It’s been a little while since we last wrote about anything* the UK’s value added tax laws: let’s correct that oversight.
The First-Tier Tax Tribunal judgment in the case of Global by Nature vs HM Revenue & Customs recently landed on our screens. At its heart lies the same struggle that has wracked Britain since, uh, the 1970s: the UK’s tax authorities wanted a company to apply VAT to its products, while the company didn’t want to do that.
In GBN vs HMRC, the products in question were three varieties of “powdered vegan food supplement”, which were marketed under the ‘Sunwarrior’ brand. Here’s an example of how one of the products in question is packaged:
We couldn’t find a clear-enough image of the product within, but… it’s a powder. Just imagine powder.
The specific argument? Whether this powder counts as a sports drink, and therefore incurs VAT at the standard rate (currently 20 per cent).
GBN, as you might expect, hoped the answer would be no, and — after some back-and-forth over certain products — filed a claim stating they believed they were owed about £800k in over-declared output tax.
An HMRC officer disagreed with this assessment, and off t’trial they went.
Wet, wet, wet
The basic structure of relevant VAT law goes something like this:
— All products and services are subject to VAT
— Some items are exempt
— Some variations of exempt items are not exempt
One of the biggest and most prominent exemptions is for food, which, in general, doesn’t get VAT’d. Except a lot of food (and its subset, drink) does: sweets, alcoholic beverages and various varieties of potato crisps all incur VAT at a regular rate.
HMRC’s argument is that the Sunwarrior products were “sports drinks”, which the Act categorised thusly in a passage introduced in 2012:
4a) Sports drinks that are advertised or marketed as products designed to enhance physical performance, accelerate recovery after exercise or build bulk, and other similar drinks, including (in either case) syrups, concentrates, essences, powders, crystals or other products for the preparation of such drinks.
Fans of the technical use of the English language may see some immediate problems here. There’s no issue over it being a powder (which will functionally become a drink once mixed with water / milk / whatever). Rather, the problem is this: VAT law appears to define a sports drink as a sports drink, on the condition it is advertised as such. This does not create optimum conditions for clear judgments.
Remarkably, despite this ambiguity, the Tribunal panel of Judge Anna Redstone and Mohammed Farooq reckoned this was the first time sports drinks had got their day in court in this way:
Although there have been many appeals before courts and tribunals about the VAT status of various foodstuffs, this was the first which turned on the meaning and effect of Item 4A
Buckle up, the law’s about to be made.
Some words on words
As discussed in our previous VAT coverage, there’s an often farcical tendency for these cases to boil down to shockingly basic tenets: the dictionary definitions of words, or a senior judge’s views on when one should eat cake.
On the legal hermeneutics side of all this, the ur-text is the VAT Act itself, the principles laid down by the UK’s parliamentarians to determine exactly what should get taxed.
And in a weird way, the Act itself isn’t allowed to be wrong, even when it pretty clearly is. The Tribunal cites Lords Nicholls of Birkenhead, as quoted by Lord Hodge in R (Project for the Registration of Children as British Citizens) v SSHD:
Statutory interpretation is an exercise which requires the court to identify the meaning borne by the words in question in the particular context.
And Lord Nicholls, from the same source:
Citizens, with the assistance of their advisers, are intended to be able to understand parliamentary enactments, so that they can regulate their conduct accordingly. They should be able to rely upon what they read in an Act of Parliament.
Lord Hodge gestures at the help provided by “external aids to interpretation”, but concludes that, ultimately, the Act’s the thing:
[None] of these external aids displace the meanings conveyed by the words of a statute that, after consideration of that context, are clear and unambiguous and which do not produce absurdity…
Based on this, the Tribunal said their task was simple: to determine (deploying the language of Lord Reid of Drem) “the meaning of the words which Parliament used”.
And how hard could that possibly be?
Drink it in
It’s time.
Edward Hellier, acting for HMRC, put forward the following heuristic for determining if something is a sports drink:
…a product would fall within the exception if it was:
(1) a “drink” which was “advertised or marketed” as “designed” to do one or more of the following, in a sports context:
(a) enhance physical performance;
(b) accelerate recovery after exercise; and/or
(c) build bulk;
(2) or was a “similar drink” to one which fell within the above statutory description.
The Tribunal noted:
HMRC’s position was therefore that the term “sports drinks” was defined by the second part of the statutory phrase, so that all drinks advertised or marketed as designed to enhance physical performance, accelerate recovery after exercise or build bulk were “sports drinks” as long as there was a reference in the advertising and marketing to “sports”.
Max Schofield, acting for GBN, put forward a different view, that:
…a product would only fall within Item 4A if it was:
(1) a “sports drink”
(2) which was “advertised or marketed” as “designed to enhance physical performance, accelerate recovery after exercise or build bulk”; or
(3) was a “similar drink”.
“In other words,” the Tribunal writes, that:
Item 4A encompassed only certain sports drinks, namely those which were advertised or marketed in the way prescribed (or drinks which were similar to those types of sports drinks)…
It was therefore first necessary to establish whether a product was a “sports drink”, and if it was, the second stage was to decide whether it was advertised or marketed in the way set out in the remainder of the statutory provision. If the product was not a “sports drink”, there was no need to consider the remaining words of the exception.
Schofield’s contention is that HMRC’s approach “ignored the context and weight to be given to the word ‘sports’.”
The Tribunal agreed.
The scrying of lot 4A
In a section that betrays a slight hint of frustration, the Tribunal wrote:
We agree with Mr Schofield that Item 4A does not set out a definition of a “sports drink”. Had the statutory phrase been definitional it might have been drafted as follows:
— “Sports drinks, being drinks that are advertised or marketed as products designed to enhance physical performance, accelerate recovery after exercise or build bulk.”
…
However, the Parliamentary draftsman did not use either form of words, or any similar phraseology.
Curse that Parliamentary draftsman! If only it were the job of literally thousands of other people to check such legislation. Oh well.
As it is, we’re left with the paradox of 4A: an item that is defined seemingly in reference to itself, or by how it is presented, rather than any inherent quality. As the Tribunal wrote:
[Were] HMRC to be correct that “sports drinks” are drinks “advertised or marketed as products designed to enhance physical performance [etc]”, it is difficult to understand what is meant by “other similar drinks”. If a “sports drink” is defined by reference to its marketing, how can a product which is not so marketed be “similar” to a “sports drink”? We asked this question during the hearing but did not obtain a satisfactory response.
Blame George Osborne
For a long time, there was an uneasy peace in the world of sports drink taxation.
When the VAT Act came into force in the early nineties, 4A wasn’t part of it. Instead, there was simply 4:
4) Other beverages (including fruit juices and bottled waters) and syrups, concentrates, essences, powders, crystals or other products for the preparation of beverages.
The Tribunal notes case law had established that a dietary supplement named Bio-Light had been categorised as not a “beverage” within this taxonomy, because it was not consumed “to increase bodily liquid levels, to slake the thirst, to fortify or to give pleasure”.
A later Tribunal made the opposite conclusion with regards to an added-fibre Ribena drink (for US readers, Ribena is a fruit drink that used to be considered a health product until people decided it had waaaaaaay too much sugar for that).
The Ribena judgment ruffled industry feathers, and HMRC issued guidance that indicated that it considered sports drinks to be more like the fortified Ribena than Bio-Light, but acknowledged the growing complexity in the sector.
At Chancellor George Osborne’s 2012 Budget, the Government pledged to clear things up, saying it would:
…address anomalous VAT borderlines by applying VAT to the provision of self storage facilities and to approved alterations to listed buildings. VAT will also apply, to the extent that it does not already do so, to the sale of hot food, cold food consumed on the supplier’s premises, sports drinks and holiday caravans, and to the rental of hairdressers’ chairs.
In an associated consultation, officials said:
The change will only affect ‘sports nutrition’ drinks that are currently treated as zero-rated and ensures that all sports drinks receive the same tax treatment (‘sports energy drinks’ for example are already standard– rated as beverages). The products affected exist pre-mixed in liquid form and also in powder form to be made up into a liquid by the consumer.
They are often marketed as supplying energy to enhance performance, accelerating recovery after exercise, providing energy, or building bulk and often contain creatine.
Examples of products affected by the change include: sports nutrition drinks such as carbohydrate drinks, protein drinks, creatine drinks, work-out recovery products, whether or not in powder form.
Examples of products not affected by the change include: meal replacement drinks for slimmers and invalids.
You can read the rough history — which includes the Government of the time having to deny it would standard-rate milk (often advertised as a performance drink) — here.
Suffice it to say: decisions were made, 4A came to be, and a bit over a decade later this tax Tribunal found itself in a pickle.
A question of sport
Judgment:
Since a product must be a “sports drink” to fall within Item 4A, the next question is “what is a ‘sports drink’? There is no definition in the legislation, and we considered the ordinary usage.
Dictionary time! GBN put forward seven rough definitions of sports drinks: four from dictionaries, and three derived from other usage. To give a sense of how typically mushy these are, here are the dictionary citations:
(1) “a drink that consists mainly of water, electrolytes (such as sodium or potassium), and carbohydrates (such as sucrose or fructose) and that is designed to replenish those substances in the body during or after usually strenuous exercise” (Merriam-Webster);
(2) “a type of cold drink that contains sugar and other ingredients that help you to get back energy lost through exercise” (Oxford Learners Dictionaries); and
(3) “a soft drink containing electrolytes such as sodium, potassium, and chloride, and a high percentage of sugar, designed to restore energy during or after sporting activity or strenuous exercise” (Oxford Languages Dictionary, used by Google).
(4) “a drink containing sugar and salts, etc designed to help replace fluid and energy lost through the physical exertion of sport” (Collins)
So, variously, sports drinks might have to be:
— mainly water
— cold
— containing salt
The judgment wraps up the shared quality:
Taking into account all of the above, we find that “sports drinks” contain a significant amount of carbohydrate (usually sugar)…
We were not provided with any evidence as to the level of salts within a “sports drink” and make no related finding.
…and that’s it.
All shook up
Readers may be curious at this stage about what this all means for protein powders, which are often combined with liquid in a “shake” and drunk.
Given 4A refers to beverages taken to “build bulk”, one might expect protein powers to be covered. However, they are not, for reasons.
HMRC guidance treats protein powders differently because they’re considered a product that “has a nutritional content; and/or provides a significant dietary requirement” but are consumed “in a manner commonly associated with food” (such as mixed with a liquid and drunk).
This is obviously confusing, given the Budget consultation cited above specifically mentioned “protein drinks… whether or not in powder form”,
But remember! Parliament is sovereign, not any of that distasteful secondary guidance. The Tribunal cites Lord Hodge again, saying the 2012 consultation cannot:
…displace the meanings conveyed by the words of a statute that, after consideration of that context, are clear and unambiguous and which do not produce absurdity.
The only possible conclusion FT Alphaville can reach here is that 4A is basically a fundamentally flawed piece of legal writing: despite setting out with the intention of capturing “sports nutrition” drinks (explicitly including protein powders), the legislation ended up just covering “sports drinks”. Womp womp?
With that, uh, settled, the Tribunal were sure what they were looking for:
[We] find that the ordinary meaning of the term “sports drinks” is a drink which contains a significant quantity of carbohydrate, usually sugar, together with salts (such as sodium and potassium) which provide electrolytes.
It’s somewhat surprising that despite earlier saying they couldn’t reach any conclusions about salts, the Tribunal still deemed them to be inherent to sports drinks. But we suppose there has to be some kind of distinction to stop them just being confused with regular sports drinks.
Drink while you think
Things had boiled down to a two-stage test, following Schofield’s model. A product would fall under exemption 4A (and therefore incur VAT), if it:
— was a sports drink; and either
— was advertised or marketed in the way described; or
— was similar to other sports drinks that were advertised or marketed in that way.
The Tribunal notes that it found as a fact that:
a “sports drink” is a drink designed for sports people which contain [a] significant amount of carbohydrate
Wait wait wait. “Designed for sports people?” Literally — we’re not being funny or nothing — where did that come from and what does it actually mean?
Thankfully, things didn’t get hung up on this new development: the Tribunal ruled that Sunwarrior products are low in carbohydrates and contain a negligible amount of salts, ergo they are “not sports drinks”, and wouldn’t fall under 4A. Bish bash bosh.
So, sorted right?
…
…
…
…
…
Uggghhhh.
Judgment:
Although we have agreed with Mr Schofield’s analysis of the statutory provision, we went on to consider whether the Products would be within Item 4A if Mr Hellier were to be correct, given that (a) this alternative view was fully argued with extensive reference to the evidence, and (b) this is the first case to be decided on the meaning of Item 4A.
Hellier and HMRC’s view is basically this: all that matters is perception. A sports drink is a sports drink if it’s sold as a sports drink. To quote Eminem in a way that doesn’t actually make any sense in this context:
I am whatever you say I am / If I wasn’t, then why would I say I am?
Out of an abundance of caution, the Tribunal decided they’d have a think about what this approach might mean in practice.
Umpire of the sun
Thus begins the holistic, multifactorial assessment of the branding of Sunwarrior products.
A broad conclusion the Tribunal reached, to be reductive, is that much of the copy employed on Sunwarrior’s websites (GBN acts as a Sunwarrior supplier in the UK, and “piggybacks” off its US marketing) was pitched more woo-woo than workout. For instance, from the US site:
Sunwarrior is here for every step as you take your nutritional journey to light, energy and love. We believe the answers to optimal health are found in nature. Our vision is to taste better and be healthier so that we can accomplish our mission to help you be your best self, performing at your optimum and living your best life.
The judgment notes that the US site had a sports category section, while the UK site did not. We’d note that the UK website doesn’t have category sections at all, so this is something of a moot point.
The Tribunal’s basic verdict based on this — and testimony that gyms and fitness services were a minor part of GBN’s clientele — was that Sunwarrior products were not being marketed specifically as sports products, and instead had been aimed at helping a variety of customers lead “healthy active lives”.
Hold on, said HMRC’s Hellier, who
…submitted that the Sunwarrior brand was itself a relevant factor in assessing whether or not the Products met the conditions within Item 4A. In his submission, the word “warrior” connoted “activity and action”.
No, you hold on, said GBN’s Schofield, triggering a piece of judgment so absurd we’re going to quote it in full:
105) Mr Schofield invited us to reject this submission, pointing out that the meaning of the brand name was explained in a video called “Legend of the Nonwarrior”, a link to which had been provided to HMRC. This said that:
“Sunwarriors through the diligence and faith conquer all darkness, sickness, disease and poverty through the lightening power of an ancient mystery path called agápe [sic]. Through the spirit, knowledge and power of agápe the Sunwarriors were transformed and transcended by pure light energy.”
106) That passage is echoed in the Sunwarrior mission statement, see §88, which says “Sunwarrior is here for every step as you take your nutritional journey to light, energy and love”; it is also reflected in the post-2020 packaging (see the discussion later in this judgment), which says that Sunwarrior’s mission is to “illuminate body, mind and planet”.
107) We find as a fact that the brand name is used in the marketing by emphasising the “sun” part of the word “Sunwarrior” rather than by giving any specific meaning to the word “warrior”.
What a time to be alive.
Chia? I hardly even…
As part of their determination to really put 4A through its paces by fully thinking through the advertising-led approach, the Tribunal assessed the three products in question one by one.
There’s a lot to describe here, so we’re going to move quickly.
First up was Sunwarrior Classic, which is primarily made from brown rice. Here are some snatches of the Tribunal’s assessment:
After the change of packaging in 2020, the front panel described it as “Protein classic”, again with the word “Protein” in large print. It also included the words “clean and simple”, “organic plant-based”; “sprouted and fermented” and “natural”. In smaller type were the words “20g protein” in white, standing out against the green background…
The back panel has a picture of a woman and child in a garden, underneath which is the following text; the eye is drawn to the emboldened words, including “Plant-based” and “Organic Ingredients”…
The remaining side panel is headed “for the conscious warrior” with the word “conscious” in large print; underneath are the words “simply whole grain brown rice”.
There were some references to working out and back-and-forth between the two parties’ representatives over the use of phrases like “active lives” and “essential for muscle and tissue repair”. However, our eye was caught by this part:
(7) The drawing showing a tub of Classic in a yoga pose. Mr Hellier’s position was that yoga was a sport, and that the use of this cartoon showed the Products was advertised or marketed as designed to enhance physical performance etc in a sports context. Mr Schofield did not accept that yoga was a sport, and submitted that in any event the use of a cartoon figure was insufficient to show that Classic was being marketed as designed to “enhance physical performance, aid recovery or build bulk”.
Yes, obviously yoga isn’t a sport. Sure, there is competitive yoga but you can do almost anything competitively without that thing therefore being a sport. We are pre-emptively rejecting any counterarguments to this, no matter how well-intentioned.
Long story short, the Tribunal agreed with GBN, and moved on to Sunwarrior Plus.
The takeaways here were… basically the same, but as ever it’s worth dwelling on the role of the Aztec empire in all this. The judgment makes reference to a letter supplied by the HMRC officer who made the initial judgment, which quoted the following extract from Sunwarrior bumf:
Chia seeds are the tiny nutrient-dense powerhouses that the Aztecs used to feed their people, armies, hunting parties and runners.
HMRC’s Hellier seized on this as evidence that Plus is designed for sports (disappointingly, there’s no discussion of the nature of Aztec flower wars and how they fit within the war/sport paradigm). The judgment took short shrift with this:
…we rejected this submission: the passage refers to the use of one single ingredient by a previous civilization, who are also described as using chia seeds to “feed their people”
Some more arguments about yoga and other ugliness aside, the Tribunal once again deemed Plus didn’t qualify for the “presents itself as a sports drink therefore is a sports drink” approach:
We find as a fact that Plus is marketed and advertised as suitable for people who are seeking healthy plant-based nutrition, and not as “designed to enhance physical performance, accelerate recovery after exercise or build bulk”.
The way of the Warrior
And so we arrive at Warrior. The judgment notes…
Unlike the other two Products, Warrior contains no brown rice, being instead a blend of protein from peas, hemp and goji berries, together with ground coconut.
…but of course that doesn’t really matter at all. What does matter is that where Classic and Plus were all about nature being lovely, Warrior’s about you getting JACKED. Bumf:
Synergy is the secret. Four powerful ingredients combine to make WARRIOR BLEND superior to any single ingredient alone. Want a complete, balanced amino acid profile full of BCAAs to help you build lean muscle? Want natural antioxidants and electrolytes to enhance your workouts? Want the energy, endurance and recovery found in MCTs to push you further and harder than ever? Demand more from what fuels your active life! Demand a protein designed for the Active Warrior in you.
Among other such muscular branding, the Tribunal notes a claim that Warrior:
fuses the power of several rich protein sources into one smooth, great-tasting formula that is overwhelmingly superior to the individual components alone
In this instance, the Tribunal was convinced, siding with HMRC’s Hellier that Warrior had been marketed as “designed to enhance physical performance, accelerate recovery after exercise or build bulk”.
Where they went from there is intriguing. The natural follow-up contention is that if Warrior advertises itself as being sporty, and therefore is sporty (under what, let’s not forget, is basically a legal thought experiment), does that not then cover Classic and Plus as “similar products”?
No, reckons the Tribunal, because at that point ingredients would start to matter (their emphasis):
…recognising that all the Products consist largely of plant proteins, it is clear from our findings of fact that the primary ingredients used in Warrior are significantly different from those in the other two Products. Both Classic and Plus are made essentially from brown rice, whereas Warrior is a blend of peas, hemp, goji berries and coconut. The advertising and marketing for Warrior focuses on the “dynamic fusion” of those ingredients, describing it as (our emphases) “a unique, raw, plant-based protein unlike any other“.
W… what? So words matter and materials don’t, unless those words happen to follow a formulation that is somehow reinforced by the materials? We need a drink, and not a sports one.
Finishing up
Riddle us this:
151) If Mr Hellier were to be correct as to the statutory interpretation of Item 4A, neither Classic nor Plus would be within Item 4A. They are thus zero-rated whether or not his reading of the provision is correct.
152) However, Warrior is marketed as a product “designed to enhance physical performance, accelerate recovery after exercise or build bulk”, and so if Mr Hellier’s reading were to be correct, Warrior would be excluded from zero rating by Item 4A and be standard rated.
One way to spare yourself the mental torment of dwelling upon a style of legal distinction that is this vibey, remember: this is all just a hypothetical.
The material decision the Tribunal reached is much more prosaic: the Sunwarrior products ain’t sports drinks, so they ain’t sports drinks:
157) We allow GBN’s appeal because we have found as follows:
(1) Item 4A applies to certain “sports drinks” and a product which is not a sports drink as that term is normally understood, is not within the exception.
(2) “Sports drinks” are drinks designed for sports people which contain significant levels of carbohydrate (usually sugar) and may contain salts (such as sodium and potassium).
(3) The Products contain low to negligible levels of carbohydrate and so are not “sports drinks”; they thus do not come within Item 4A.
157) If our statutory interpretation of Item 4A were to be wrong, so that Item 4A applies to any drink advertised or marketed as “designed to enhance physical performance, accelerate recovery after exercise or build bulk” in a sporting context, then:
(1) Classic and Plus do not satisfy those requirements;
(2) Warrior does satisfy the requirements and so would be a “sports drink”;
(3) Neither Classic nor Plus are “similar drinks” to Warrior; and thus
(4) Warrior would be standard rated, and the other two Products zero-rated.
Nice. And if their statutory interpretation of 4A is wrong, may God have mercy on whoever next has to make a judgment based on it.
Further reading
— When’s a flapjack not a flapjack? It’s a maddeningly difficult question
*flu sucks
