19911

VAT – ZERO RATE – flavoured soya milk – zero rate? – yes – appeal allowed.

LONDON TRIBUNAL CENTRE

	ALPRO LIMITED	Appellant

-	and –

	HER MAJESTY’S REVENUE AND CUSTOMS 	Respondents

				Tribunal:	Richard Barlow (Chairman)
						Catherine Farquharson

Sitting in public in London on 18 and 19 September 2006

For the Appellant Roderick Cordara QC and Paul Key instructed by Pricewaterhouse Coopers Legal  LLP.

For the Respondents Matthew Barnes instructed by the Solicitor and General Counsel for the Commissioners of Revenue and Customs.

© CROWN COPYRIGHT 2006

DECISION

Introduction.

1.	The appellant appeals against a decision conveyed in a letter dated 21 July 2004 by which the respondents notified the appellant that they consider that certain flavoured varieties of soya milk products are standard rated for VAT.  The flavours in question are vanilla, strawberry and banana.  The appellants dispute those decisions.  

2.	That letter also stated that unsweetened and sweetened but otherwise non-flavoured soya milk are zero-rated for VAT as is chocolate or cocoa flavoured soya milk.  The appellants agree with those decisions.  

3.	The respondents had earlier decided that sweetened but otherwise non-flavoured soya milk products are standard rated for VAT but that decision was withdrawn by the letter of 21 July 2004.

4.	The appellant also appeals against assessments to value added tax that were maintained (albeit at reduced amounts as a consequence of the revision of the earlier decision) or subsequently made as a result of the decisions under appeal.  The original assessments had totalled about £4.4 million and the revised assessments totalled about £250,000 but depending on our decision there might be a continuing liability.

5.	We were asked to make a ruling in principle only and we have not been asked to decide any issue about the quantum of the assessments and we were told that their validity is not in dispute except in so far as the underlying liability is in dispute. 

6.	We have been provided with a joint bundle of documents, skeleton arguments from both parties, a joint bundle of authorities, transcripts of the hearing and samples of the appellant’s products and other similar products made by third parties.  Counsel assisted us greatly with succinct and helpful oral arguments as well as their skeleton arguments.  We heard evidence from John Allaway, the appellant’s commercial director, Sean Strain, Professor of Human Nutrition at the University of Ulster (called by the appellant and giving evidence as an expert witness) and from Kathryn Kelly, VAT assurance officer of the respondents’ Kettering office.

7.	The relevant statutory provisions are as follows (all from the VAT Act 1994):

Schedule 8 (providing for zero rating induced by section 30);

“GROUP 1 – FOOD

The supply of anything comprised in the general items set out below, except-

(a)	…
(b)	a supply of anything comprised in any of the excepted items set out below, unless also comprised in any of the items overriding the exceptions set out below which relates to that excepted item.

General items

Item No.
1.	Food of a kind used for human consumption.
…

Excepted items

Item No
…
3.	Beverages chargeable with excise duty …
4.	Other beverages (including fruit juices and bottled waters) and syrups, concentrates, essences, powders, crystals or other products for the preparation of beverages.
…

Items overriding the exceptions.
Item No
…
4.	Tea, maté, herbal teas and similar products, and preparations and extracts thereof.
5.	Cocoa, coffee and chicory and other roasted coffee substitutes, and preparations and extracts thereof.
6.	Milk and preparations and extracts thereof.
…

NOTES
(1)	Food includes drink.
…
(6)	Items 4 to 6 of the items overriding the exceptions relate to item 4 of the excepted items.
…”

8.	Article 28(2) of the VAT Sixth Directive allows “exemption with refund of the tax paid at the preceding stage” (which the UK calls zero rating) only in cases where the conditions laid down in article 17 of the Second Directive are complied with which include the requirement that the exceptional provisions should be “for clearly defined social reasons”.

The issues.

9.	There is no doubt that soya milk is food for the purposes of Schedule 8.  That is the effect of Note (1) and it was not disputed by the respondents.  

10.	The respondents contend that flavoured soya milk is an “other beverage” within exception 4 and therefore standard rated because it is an exception to the zero rating for food.  The appellant contends that flavoured soya milk is not a beverage and therefore it is zero rated as food or, in the alternative, that it is “milk” falling within overriding item 6 and so even if it is a beverage it remains zero rated because the exception is overridden.

The evidence.

11.	Mr Allaway’s evidence was mainly directed to the question whether the flavoured soya milk drinks are “milk” though it was also relevant to an extent to the question whether they are beverages.

12.	He explained the history of soya milk which has been used in Asia, China in particular, for many centuries and in Europe and North America for about 100 years.  It is used as a substitute for animal milk for example for medical, ethical, health and religious reasons.  People who are lactose intolerant, vegans, people requiring a low cholesterol diet and people following strict kosher diets were examples given.

13.	In the UK soya milk is mainly sold in supermarkets and health food shops.  In supermarkets it is marketed alongside similar milk products and this applies to the flavoured soya milk as well as the plain and sweetened versions.  It is marketed as an alternative to dairy products.  

14.	The United States farming industry was instrumental in preventing soya milk from being sold as ‘soymilk’ when it entered the market and the first manufacturer voluntarily agreed to call it Soya Lac though that is no longer the case and it is now sold as ‘soymilk’ in the USA, Australia and New Zealand. 

15.	By reason of Council Regulation (EEC) 1898/87 ‘on the protection of designations used in marketing milk and milk products’ “milk” can only be used to describe “the normal mammary secretion”.  There is an exception for traditional usages like coconut milk and the UK wanted to include soya milk in the list of traditional usages and did so for a time but that was ended in 1995 at the request or direction of the Commission.  

16.	The appellant’s products are sold as “soya” but the cartons often contain wording like “dairy free alternative to milk” or “dairy free shake”.   

17.	Statistical analysis of shopping habits shows that quite a high proportion of people buying soya milk do so specifically as an alternative to animal milk products and use them in the same way as animal milk.  The single most common reason for purchasing soya milk is that it is considered more healthy than animal milk.

18.	We accept Mr Allaway’s evidence and find the facts summarised above to be the case.  Mr Barnes did not challenge much of the evidence though he did demonstrate that there is what we regard as a minor difference in the recommended use of soya milk and animal milk in the case of very young children. 

19.	Professor Strain’s evidence was firstly directed to the nutritional benefits of soya milk compared with animal milk.  Although these were well demonstrated we do not consider it very relevant.  If anything it points up a difference rather than a similarity with animal milk.

20.	He also fully confirmed what Mr Allaway had said about the reasons why some consumers use soya milk as a substitute for animal milk.

21.	Professor Strain’s evidence also dealt with the question whether soya milk is a beverage.  It appears there is no clear scientific basis for distinguishing a beverage from any other liquid drunk by human beings.

22.	However, Professor Strain was able to give a clear account of one issue that is relevant to that question.  Soya milk or animal milk is not particularly suited to slaking one’s thirst.  Because it has a high water content, as does animal milk, it will hydrate the body.  However because both soya milk and animal milk contain protein anyone drinking enough of them to hydrate themselves would feel uncomfortably full because the digestive system would process the protein as food as well as the water content for hydration.  This was a fact based on scientific knowledge and we find it both relevant and proved to our satisfaction.  Professor Strain agreed there was no scientific definition of a beverage but he gave it as his own opinion that a beverage would contain water and not much else except sugars and that it would therefore slake the thirst as well as hydrating the body without making a consumer feel uncomfortably full.  

23.	Kathryn Kelly’s evidence was directed to the inquiries made by Customs and the assessment and decision making process.  Although Mr Cordara was able to show that the Commissioners’ thinking about why some soya milk should be zero rated and some should be standard rated was confused, particularly as expressed in their Public Notice, we do not regard that as particularly relevant as we have to decide that issue and whether or not the Commissioners have arrived at their decision by a confused process of reasoning neither determines that the end result of that process is right or that it is wrong. 

24.	Mr Cordara invited us to taste the three types of soya milk in question and some similar drinks made from animal milk.  Mr Barnes did not object to that.

25.	We drank samples of all three products (strawberry, banana and vanilla flavours) at fridge temperature.  They were all palatable and tasted without an immediate comparison with the animal milk drinks we would not have been able to tell that they were not made from animal milk.  Then we tasted the equivalent animal milk drinks also at fridge temperature.  Tasting the two alternatives with only a short interval between the tastings we found that it was possible to tell which was the animal milk drink and which the soya milk drink.  That is not to say that the animal milk drinks tasted better than the soya milk drinks and we found that the animal milk drinks did not taste better; just different.

The parties’ contentions.

26.	Mr Cordara submitted that the products have many similarities to animal milk and, as well as the points already referred to above he pointed out that soya milk can be used in cooking in much the same way as animal milk, which we accept is the case.  

27.	He contended that the social policy behind the relevant legislation, which is in effect required to comply with the Directives cited above, is that food should be exempted from the effect of the tax.  In particular, the fact that animal milk is treated as food and not as a standard rated beverage and that that is the case for flavoured animal milk as well as plain leads to a conclusion that as a matter of policy the same could apply to the products in question because of their similarities to animal milk in terms of use as food.  Indeed he added that not only could it be justified as a matter of policy that these products should be zero rated, that should be the case because of the principle of the neutrality of the tax and equal treatment.

28.	Mr Cordara submitted that the disputed products are not beverages.  He pointed out that they are identical to the plain product, which is zero rated, except for the flavouring and that if flavouring makes no difference for animal milk the same should apply to soya milk.  He relied on the case of Bioconcepts Limited –v- The Commissioners of Customs and Excise (1993 - Decision 11287) for the proposition that “beverage” in Schedule 8 does not mean simply all drinkable liquids and that, as the Tribunal held, they are liquids that are characteristically consumed “to increase bodily liquid levels, to slake the thirst, to fortify or to give pleasure” (see page 9).  

29.	It was in this context that Professor Slain’s evidence was relevant.

30.	Mr Cordara also cited Commissioners of Customs and Excise –v- Savoy Hotel Ltd [1966] 1 WLR 948 (a purchase tax case).  In that case the phrase being defined by legislation was “manufactured beverage” and the legislation was interpreted so as to give some effect to the phrase itself even though it was followed by the words “includes fruit juice” which, if taken literally and in isolation, might be taken to mean fruit juice that had not been manufactured in any real sense.  Mr Bennion has described this as “the potency of the term defined” (see section 199 in Statutory Interpretation 4th Ed Butterworths London 2002).  Mr Cordara argued that the same principle applied to the term “beverage” and that therefore, even if the reference to “milk” in the overriding provisions might suggest that milk is a beverage and by extension therefore that soya milk is a beverage because of its similarities to animal milk, that would not be the correct interpretation because it would depart too far from the normal meaning of the word “beverage”.     

31.	In addition, Mr Cordara referred us to the case of Tropicana UK Ltd –v- The Commissioners of Customs and Excise (1993 - Decision 10907).  In that case the tribunal had stated, purely in an aside that was not part of its reasoning, that milk is a beverage.  In case the analogy between animal milk and soya milk might then suggest that soya milk is a beverage Mr Cordara asked us to have regard to the legislative history of the present Group 1 of Schedule 8.  This argument was also intended to refute any suggestion that logically milk must be a beverage because otherwise the overriding item would not be needed.

32.	The decision in Tropicana was released on 23 July 1993.  The Value Added Tax (Beverages) Order 1993 (SI 1993/2498) was laid before Parliament on 18 October 1993 and it replaced the term “Other manufactured beverages” in what is now item 4 of Schedule 8 with “Other beverages”.  Significantly at the same time it added a new overriding item in the same form as the present item 6 i.e. “Milk and preparations and extracts thereof” whereas before that milk had only been referred to in the form of “preparations of milk” and not milk itself.

33.	The effect of that amendment was certainly to remove any possibility that the obiter dictum in Tropicana could lead to milk being taxed.  Mr Cordara argued that it was apparently only introduced for that reason and that therefore the overriding item having been introduced, in that respect at least, only from an abundance of caution, it provides no support for a proposition that milk is a beverage.  By extension it provides no grounds for supposing that the similarities between soya milk and animal milk suggest that soya milk is a beverage.  

34.	Mr Cordara’s argument about whether the products are milk was based on the factual matters referred to above and to the contention that to refer to soya milk as milk is normal in every day conversation.  He added that the legislation does not refer to cows, sheep, goats or other animals which it could easily have done if it had been intended to refer only to animal milk.  He also contended that no obvious social policy required the zero rating of milk to be limited to animal milk.

35.	Mr Barnes accepted that the soya milk products in question would fall within the definition of food unless they are within the exceptions and are not within the overrides.

36.	He pointed out that exceptions to the intended general scope of taxation imposed to give effect to the Sixth and other VAT Directives must be construed narrowly.  He also pointed out that the equal treatment principle does not permit Member States to exempt supplies that ought to be taxed if they are similar to other supplies that are exempted but rather requires the Member States to tax those similar supplies.  He cited Idéal Tourisme –v- Belgian State [2001] STC 1386 at page 1397 (paragraph 33). 

37.	Mr Barnes rightly submitted that the correct approach for the tribunal to adopt is that set out in Customs and Excise Commissioners –v-Ferrero UK   [1997] STC 881 at 884 b-g and 888 d.  That case concerned the question whether a product was a biscuit and it was held by the Court of Appeal that where an ordinary word is not given a definition that requires it to be given an artificial meaning it has to be given its ordinary meaning as a word in the English language and whether a product falls within that meaning is a question of fact and degree.  As Lord Woolf MR put it: “The tribunal had to answer one question and one question only: was each of these products properly described as biscuits or not”. 

38.	Mr Barnes drew our attention to the case of Customs and Excise Commissioners –v- Quaker Oats [1987] STC 683 and in particular page 689 e where Kennedy J referred with approval to the argument of counsel that when considering whether a product is a biscuit the ingredients, process of manufacture, appearance and (at page 690 f) marketing are relevant and indeed we note the emphasis placed on marketing by Lord Reid in the Ribena case cited in Quaker Oats at page 690.  We found this reference helpful but we do not think the list of factors was intended to be exhaustive though we do also agree that a similar approach should be adopted in answering the question of categorisation of flavoured soya milk as was adopted for biscuits.

39.	Mr Barnes contended that the soya drinks are taken to slake the thirst and referred to a letter from the appellant saying so.  We have to decide this case on the facts and do not regard the appellant as bound by its correspondence and we note that the letter only makes passing reference to slaking the thirst and that it was written by a Belgian director whose no doubt excellent English is not that of a native speaker.

40.	The respondents’ case so far as the facts are concerned is that the ingredients of the products are essentially water, with soya beans, flavouring and sugar and that the flavours make them unlikely to be used in food and have the appearance and taste of beverages and are marketed as beverages.

41.	Mr Barnes contended that the normal and primary dictionary meanings of milk are first those of mammalian secretions for the nourishment of young and second the milk of cows, goats, and sheep as food for human beings.

42.	He asserted that the respondents’ treatment of the various forms of soya milk by zero rating those likely to be used in a way analogous to food but not those to be used in other ways is consistent with the social policy behind Group 1 of Schedule 8. 

Discussion.

43.	It is not easy to identify precisely the social reasons for every item that is or is not zero rated in Group 1 of Schedule 8 though at least two themes are discernible.  

44.	The first is that the most commonly consumed drinks (other than alcoholic drinks) are zero rated.  These include teas and similar products and coffee and similar products.  Clearly tea and coffee and similar products were apt to be included in the beverage category unless excluded from it by the overriding items.  

45.	The second theme is a set of somewhat miscellaneous items such as drained cherries and candied peel that are excluded (as Note (5) makes clear) in case they would be categorised as confectionery and milk that is excluded (as note (6) makes clear) in case it might be categorised as a beverage.  These items and others appear to be excluded from an abundance of caution.  We say that because it seems unlikely that drained cherries and candied peel would readily fall within the normal meaning of confectionery and so the overriding provision seems hardly necessary.  

46.	Was milk also excluded from an abundance of caution?  Had we been asked to decide if milk is a beverage we would have found that it is not for the same or at least similar reasons to those which we will give below for finding that soya milk is not a beverage.  It appears therefore that it was excluded from an abundance of caution, though whether that was directly as a result of the Tropicana case it is impossible to say.

47.	It is difficult to say exactly why each item that is excluded has been excluded.  Cocoa is a particularly paradoxical item in our view, unless it is because it is usually made as a milk drink, because it might be seen as something of a luxury item. 

48.	It is also easy to imagine the political furore that would have resulted if milk had been taxed at a time when it still enjoyed a near iconic status in the national diet (free milk in schools and the affection for the tradition of daily delivery at the doorstep come to mind).

49.	Whilst having difficulty in ascertaining the full reasoning behind the zero rating provisions in social policy terms we are quite satisfied that milk is not referred to in the overriding provisions because it is a beverage but rather at most to avoid any suggestion that it might be.

50.	It follows that the similarities between milk (if that means animal milk) and soya milk do not necessarily lead to the conclusion that soya milk is a beverage.

51.	Milk is a word that has a normal meaning in the English language and we find that when used on its own it means animals’ milk.  In common usage soya milk is referred to as soya milk and indeed it is clear that although manufacturers might have preferred to use the term milk when describing it they have sometimes met opposition from the producers and distributors of animal milk or even from legislation.  We have seen no evidence that manufacturers and distributors of soya milk would have ever wanted to call it milk without the addition of the reference to soya and indeed their marketing strategy has been to emphasise its superiority over animal milk in some respects or for some consumers; which would require the product to be described as soya milk even if the word milk is allowed.

52.	We hold that the reference to “milk” in overriding item 6 is using the word in its normal meaning as described in the last paragraph i.e. it does not include soya milk.  

53.	We have already indicated that we have found that soya milk is not a beverage and as it is food it also follows that it is zero rated under item 1 and remains unaffected by exception 3.

54.	Our reasons are as follows.  

55.	It is, firstly, a question of what the word “beverage” means as an ordinary word in the English language and we refer to the guidance already given in the Bioconcepts case.  In light of that, soya milk, including the flavoured varieties, is not apt to slake the thirst and although it does increase bodily liquid levels that is not likely to be the reason it is consumed.  It is less likely to fortify than a sugary drink if fortify means to increase one’s vigour quickly.  Of course as soya milk is nutritious it will fortify someone in a longer time span.  It presumably gives pleasure to the consumer in much the same way as flavoured milk does though not in the same way that alcoholic beverages or sugary drinks might.  

56.	The flavoured soya drinks are not marketed in the way beverages like alcoholic drinks and sugary soft drinks are marketed.

57.	They can be used in cooking and we were shown recipes for such use though in the case of the flavoured drinks we assume they are not much used in cooking.

58.	The above pointers suggest that consideration of most of the relevant factors point to the conclusion that soya milk is not a beverage.  However, close analysis is impossible and ultimately the answer to the question whether the flavoured soya milks are beverages is at least partly a matter of impression and both members of the tribunal have come firmly to the same conclusion which is that as a matter of fact the products in question are not beverages.  We have reached that conclusion on the basis of the totality of the evidence put before us.

Conclusion and determination of the appeal.

59.	We find that the flavoured soya milk is not “milk” within the meaning of overriding item 6 but neither are they beverages within the meaning of excepted item 4 so they remain zero rated and the appeal is allowed so far as it relates to the liability issue and the assessments under appeal are discharged.

60.	Mr Cordara asked for the appellant’s costs if the appeal were to succeed and we award the appellant its costs to be determined by a chairman of the tribunal sitting alone if not agreed between the parties.

					CHAIRMAN: RICHARD BARLOW

					RELEASED: 28 November 2006

LON/04/1205