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HMRC internal manual

VAT Food

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Excepted items: beverages: milk and milk-based drinks

Milk

With effect from 1 October 2012 excepted item 4A relating to Sports Drinks was introduced into the VAT Law. This item specifically standard rates all sports drinks even if they are milk based - for more information about the new exception for Sports drinks see VFOOD7590.

When VAT was introduced, milk was accepted as a zero-rated food that was not considered to be a beverage. However, in the light of the Tropicana (V.10907) case, the Value Added Tax (Beverages) Order 1993 was brought in and widened the scope of what was a beverage. However, it then zero-rated milk by establishing a new item overriding the exceptions (now overriding item no 6 Milk and preparations and extracts thereof). 

The subject of whether milk is itself a beverage was discussed in the tribunal cases of Alpro (V.19911) and R Twinings (V.20230). Whilst the chairman in the Alpro case felt that it was not, the Chairman in the latter case disagreed.

The wording of the overriding item ‘milk and preparations and extracts thereof’ is important. The express inclusion of ‘milk’ as number 6 in the list of overriding items to the excepted item ‘other beverages’, along with tea and also cocoa and coffee confirms, in the view of this tribunal, that milk is now for these purposes a beverage. The tribunal is conscious that in taking this view it is disagreeing with the tribunal in Alpro. At paragraph 49 that tribunal commented:

‘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.’

This tribunal respectfully begs to differ. That tribunal appears to have reached that conclusion partly because it did not consider milk a beverage as a matter of fact. This tribunal, as a matter of fact - as we explain below - disagrees. If the wording of the law is approached from our assumption rather than that of the tribunal in Alpro, then our view is that one cannot find the same satisfaction in reaching that tribunal’s conclusion. Indeed, in our view, it argues to the opposite conclusion. The famous campaigns in the past encouraging everyone to ‘drinka pinta milka day’, the provision of free milk for all schoolchildren at school, and also of free milk for younger children through local welfare programmes, clearly gave milk the status that that tribunal referred to as ‘near-iconic’. But we remain entirely unpersuaded that milk was nonetheless not a beverage in fact.

The Commissioners consider that milk is a beverage and as such is zero-rated by item 6 of the items overriding the exceptions.

The legal reference to milk relates to dairy milk, including that of sheep and goats. Substitutes for dairy milk, such as plain soya or rice ‘milk’, are also accepted as zero-rated foods, since they are used as a replacement for milk by those who are allergic to dairy products. Coconut milk is not regarded as falling within overriding item 6, but is zero-rated in its own right as a food when it is sold as a culinary ingredient.

Milk based drinks

Drinks, other than sports drinks, which are substantially based on milk, such as milk shakes, Ovaltine, Horlicks, or Complan, are zero-rated as preparations of milk.

Milk shake powders and flavouring

Products for the preparation of milk shakes generally fall into two categories. If such a product is a flavoured milk-based powder which when mixed with water gives a complete milk shake, it is zero-rated as a preparation of milk. If it is merely a flavouring, it is standard-rated as a preparation for making a beverage unless it is excepted within items 4 to 7 of the items overriding the exceptions.

The R Twining and Company Ltd (V.20230) case considered the strawberry flavoured version of the Max for Milk range of powders, which are added to milk and whisked to make a milkshake. The strawberry-flavoured product was only around 18% milk-based but the tribunal decided, albeit after having been initially undecided, that the product was in fact a preparation of milk and was zero-rated under the overriding Item 6. With regard to the other flavours in the range the chocolate flavour powder was accepted as being zero-rated under the overriding Item 5. It was agreed that the (milk-free) banana-flavoured product was standard–rated under excepted Item 4.

Other preparations and extracts of milk

Products such as skimmed milk powder and baby milk formula are considered to be zero-rated as food in the first instance, rather than beverages, but in the event of any doubt they would be relieved under overriding item 6. Also relieved are edible products made from milk such as coffee whiteners and creamers, lactose, whey, fermented whey, edible casein, caseinate, and lactalbumin.

Soya milk and alternative milks

The Alpro Ltd (V.19911) tribunal decided that flavoured soya milk drinks were not beverages. In doing so, the tribunal also stated that they did not consider milk to be a beverage. HMRC do not agree with that finding (see the section on Milk above). However, Customs and Excise accepted the final decision of the tribunal that the flavoured soya milk was not a beverage.

As a result, HMRC accept that such alternative milks are zero-rated because they are not beverages. This includes plain and flavoured varieties of alternative ‘milks’ made from such sources as soya, peas, oats, almonds, coconuts and rice.

Mixed drinks

The liability of beverages, such as smoothies, which comprise a mixture of

  • milk extracts (such as yoghurt), and
  • other ingredients such as fruit juice

can only be decided on a basis of fact and impression. They are zero-rated when they have the texture and nature of a milky drink, or where the predominant ingredient (other than water) is a milk extract such as whey or lactoserum. However, they would be standard-rated as beverages where the milk or milk extract content is not predominant and their nature is that of (for example) a fruit drink. See VFOOD7600.

In the case of Rivella (UK) Limited (V.16328), the tribunal found that a canned sparkling drink called Rivella and Rivella Light was zero-rated as an extract of milk. The extract of milk is lactoserum and comprises 35% of Rivella. The largest ingredient was water, being 56.58% of Rivella and 63.91% of Rivella Light. On a dry analysis of the ingredients (excluding water), the lactoserum was over 50% of the contents.

Four factors taken from the Snapple Beverage Corporation Tribunal (V.13690) case were adopted by the Tribunal:

  • ingredients;
  • manufacturing process;
  • appearance and taste; and
  • marketing and packaging.

However, the tribunal noted that the relative weight to be given to the four factors would vary on a case by case basis. Given the nature of Rivella, the appearance and taste test had little or no value because the lactoserum did not possess the milkiness of milk or preparations of milk.

Our previous guidance was quoted at length at the hearing, including our reference to products being zero-rated where the proportion of milk or milk extract is greater than 45%. The tribunal stated that the reference to 45% was wholly arbitrary and that our approach was flawed.

Of the four factors, the tribunal found that the ingredients and manufacturing process were predominant and decisive. They were also supported by the marketing process which has been successful in linking in the minds of the potential consumers the principal source of the products as extracts of milk.

The tribunal concluded that the evidence was overwhelming that Rivella and Rivella Light fell within Overriding Item 6 and were zero-rated.