For the ordinary man or woman-in-the-street, the distinction between a drink and a beverage may seem purely academic, but this has actually generated a great deal of interest for both VAT experts and the Revenue, because the implications of just where the line is drawn can have significant tax consequences.
Where products are categorised as a drink (but not a beverage) such as a bottle of milk, they fall within the definition of food and are subject to the zero rate of VAT as a result. But when they are considered to be beverages, such as a bottle of beer or a can of coke, they fall into an “excepted item” category and 20% VAT applies.
Beverage or Drink: Background
First of all, a bit of background is essential. Just how do you differentiate between a drink and a beverage, being the obvious question? This was the crux of a recent tribunal case, involving Innate-Essence Limited (t/a The Turmeric Co) vs HMRC.
The Turmeric Co supplies several different flavours of turmeric shots for the natural health benefits that can be obtained. All contain turmeric, plus other ingredients, such as beetroot, black pepper and ginger. The Turmeric Co argued that whilst the turmeric shots may be considered drinks, they were not in fact beverages, an argument they argued at the tribunal, basing their case on the reasoning that the concept had previously been proven based on a number of tests, that had established case law in this area.
In order to determine whether a drink is a beverage, it is necessary to take into account a multitude of factors including the purpose of the product, how it is marketed and what it is actually used for. The “beverage test” considers whether the purpose of consumption of the product is to increase bodily fluids, quench thirst, provide a short-term boost or simply just to give pleasure.
Importantly, any one of these factors may be present but if the purpose of consumption is not one within the beverage test, then the test is not satisfied. As an example, Calpol, the iconic medicine for children, is clearly designed to taste nice to encourage children to take it – but its purpose is certainly not intended to be consumed for pleasure, and it certainly wouldn’t be classed as a beverage under the beverage test.
Beverage or Drink: Unexpected guest test
A further, rather bizarrely named, additional test is then applied known as the “unexpected guest test”. This test considers whether it would be appropriate to offer this product to a visitor popping in for a drink. If the answer to this is no, then it is unlikely that the product will be a beverage (EG Calpol). Ultimately all the above factors need to be considered when determining whether a product is a drink or a beverage and the courts are keen to reach short practical answers.
In the case of the Turmeric Co’s products, the directors accepted that whilst the products did, by their very nature, increase bodily fluid levels and quench thirst, this was not the primary purpose of consuming the turmeric shots. After all, there are numerous other products on the market that fulfil these purposes far more thoroughly and for a much cheaper price (Turmeric Co’s price is circa £2.50 for a 60ml shot).
Similarly, the turmeric shots had no, or minimal, quick boost ingredients such as caffeine or sugar, and the website and customer reviews demonstrated that the benefits of these products are not felt immediately. Rather, the shots are consumed for their purported long-term benefits that only manifest themselves following regular consumption of the product.
Beverage or Drink: Commonsense, for once, wins!
The questions of whether the shots would be drunk for pleasure or whether they would be appropriate to serve to an unexpected guest was the crux of this case.
The tribunal’s decision was ultimately based on one simple fact, that the turmeric shots were clearly an acquired taste; this is not only my personal view but also one shared by most customers, the tribunal Chair as well as most sporting associations, such as British Gymnastics. The only voices that didn’t seem to share this view were those of the HMRC officials prosecuting the case.
The upshot (no pun intended) of these arguments, was that the tribunal Chair found that Turmeric Co’s turmeric shots were clearly drinks and not beverages, and therefore should be zero-rated. This is, of course, an over-simplification of a set of arguments distinguishing between drinks and beverages for the purposes of VAT – however it appears that the boundaries between these two definitions are becoming somewhat clearer with every case.
Tax Accountant’s view
My son is wont to make up some bizarre concoctions, loosely based on ‘smoothies’, which he considers to be health drinks. Most of them look like coloured mud with what, in my humble opinion, can only be described as a ‘bizarre’ taste. Should my first-born ever consider giving up his day-job and marketing them, I would have absolutely no doubt that they’d fly through the unexpected guest test!