Identifying the correct VAT treatment to apply to any product or service that a business supplies is key to managing profitability. Liability decisions at a later date also often impact financial viability and competitiveness, should HMRC challenge a position in the future. VAT should, preferably, be considered at an early stage in product design and certainly before the pricing model is set and the offering released to the market.
Liability challenges
Liability challenges also appear in the courts which inform the VAT treatment that has been applied in a sector. These cases can equally present opportunities or risks for operators in the same area depending on the VAT treatment they’ve applied.
Two areas where liability questions consistently arise – as noted in our previous Insight articles – are in the food and cosmetic “healthcare” areas and there was a further example of a decision reached recently that brought these two areas together and will continue to inform the VAT liability discussions in both.
Bottled Science Ltd vs HMRC
The VAT case of Bottled Science Ltd v HMRC at the First Tier Tribunal (FTT) concerned the VAT liability of a collagen drink. Unfortunately it found against the company, concluding that the drink was standard rated for VAT. Their argument had been that it qualified as Zero Rated being “food of a kind for human consumption” and that they had overpaid £1.25m in VAT as a result from past sales.
However the facts that the FTT considered in reaching this decision were, it felt, those that a ‘broad-minded VAT payer’ would consider in deciding whether the product was a ‘food of a kind used for human consumption’. The decision influencers were primarily non-technical factors such as:
- Its form
- Palatability
- Nutritional value
- Directions for use
- Cost
- Whether it is consumed as part of a meal
- Purpose
In applying this test, the FTT did not believe that it was necessary to consider whether the product was a beauty product – the only question to be addressed was whether or not it was ‘food’.
This would have been the latest in many legal challenges to the VAT liability of beauty products including collagen based products. This one was FTT only and, while it seems to be quite definitive, the value of VAT involved is large enough to suggest that the company will appeal to the next tier tribunal. (NB: the FTT is not binding, but is indicative.)
It continues to demonstrate the value in both considering the VAT liability of a potential product before it’s release but also the importance to staying up to date with liability challenges and outcomes that could influence the VAT approach to existing offerings.
If this case in particular triggers a VAT question for you then do contact the Xeinadin Indirect Team using the contact form below or via [email protected]
This article is for information only and advice should always be taken.
