Potential VAT reclaim opportunity for low carb drinks following UK tribunal decision

The dispute in the case (26-page / 432KB PDF) revolved around the VAT status of powdered vegan food supplements sold by Global By Nature (GBN), under the brand name “Sunwarrior”. GBN argued that these products should be sold zero-rated as food, meaning the products would be VAT free. VAT does not typically apply to food or drink, with a number of exceptions, including sports drinks, which are subject to VAT.

HM Revenue and Customs (HMRC) contended that the supplements were in fact sports drinks and should be standard rated. HMRC has historically taken a wide view of the meaning of sports drinks. According to HMRC, it is the way that drinks are advertised or marketed – as products designed to enhance physical performance, accelerate recovery after exercise, or build bulk – that is fundamental to their VAT treatment, not the function of the drink.

The tribunal was tasked with examining whether the “Sunwarrior” products fell under the definition of sports drinks as outlined in excepted item 4A of group 1 of schedule 8 to the Value Added Tax Act 1994 (51 pages/1.7 MB).

The FTT found that the low to negligible levels of carbohydrate in the products meant that they did not qualify as sports drinks. The tribunal agreed with GBN, stating that the products were primarily intended to be mixed with liquid and served as a drink, but they did not meet to criteria to be classified as a sports drink.

Bryn Reynolds, tax expert at Pinsent Masons, said: “In the first published case on the meaning of sports drinks, the tribunal has essentially found that there are now two limbs to fall within the excepted item – that the product is a sports drink and that it is marketed to enhance performance, accelerate recovery or bulk build, or be similar to products marketed to do that. Where a product does not meet both of those criteria, it should qualify for zero-rating, meaning VAT should not be charged.”

This ruling means that GBN has succeeded in its reclaim of overdeclared output tax, providing significant financial relief for the company.

“Other businesses in the food and beverage industry should consider whether they are in a position to submit a VAT reclaim based on the interpretation of sports drinks in this decision. However, given this is a FTT decision that HMRC may appeal, the outcome may not yet be final,” said Abigail McGregor, tax law expert at Pinsent Masons.