The flavoured-milk taxation muddle – Wacky Tax Wednesday

As a child who loved chocolate and disliked milk, I embodied the target market of chocolate Nestlé Quik (Nesquik in the UK). For me, then, it fulfilled its promise of making milk more palatable. For chocolate-milk-loving Brits, now, it has the added benefit of being tax free — unlike its strawberry-flavoured and banana-flavoured counterparts. 

Chocolate Nesquik is subject to a zero rate of value-added tax (VAT) in the UK, while both strawberry and banana Nesquik are taxed at the standard rate of 20 percent. Good news for chocoholics, though not necessarily for sellers of Nesquik who need to apply different rates to similar products. Accordingly, the differing tax rates were challenged by Nestlé, which sought a zero rate for all three. It lost.

Muddling the milk — and the issue

Nestlé argued that all three flavours of Nesquik are created and marketed as milk additions that encourage the consumption of milk. Since milk is taxed at zero percent in the UK, that’s how Nestlé’s milk flavourings should be taxed.

The company further argued that the three products should be taxed the at the same rate (preferably zero) because they’re essentially the same for the consumer: Functionally, the only difference is the flavour.

The UK Upper Tribunal Tax and Chancery Chamber (UTT) disagreed with both stances, as did the First Tier Tribunal (FTT) before it. On February 14, 2018, the UTT upheld the FTT’s 2016 decision that chocolate-flavour Nesquik is exempt from VAT while the banana and strawberry flavours are subject to the standard, 20 percent VAT.

Why?

Chocolate Nesquik is based on cocoa powder, a zero-rated food under the EU VAT Directive rules and the UK VAT Act. The other two flavours, which are not based on cocoa powder, are excepted items and therefore subject to the standard rate.

According to the UTT, “banana and strawberry flavoured Nesquik were not sufficiently similar to milk drinks or to chocolate Nesquik as to require the same zero rating.” The decision noted that in 1975, a precursor to the VAT was levied on “powders for the preparation of all beverages (subject only to the exceptions for tea, coffee, and cocoa, etc.).” [Emphasis theirs.] 

Furthermore, both tax tribunals found no indication “that Parliament intended to zero rate a powder for adding to milk which did not itself contain milk.”

A lack of consistency

Perhaps this point in the decision, taken from a 2010 ruling (Innocent Ltd v. Revenue and Customs Commissioners), properly sums up the whole case: “[T]he tribunal was … unable to identify any consistent policy behind the exception of certain beverages from food zero rating.”

As later noted, “to a modern mind at least, there are many apparent anomalies” in UK tax law. For example:

• Fruit salad is zero rated; smoothies made from fruit are standard rated
• Oranges are zero rated; fruit juices are standard rated
• Turnip crisps are zero rated; potato crisps are standard rated
• Chocolate cake is zero rated; chocolate biscuits are standard rated
• Frozen yoghurt desert is standard rated; yoghurt which is frozen but is to be eaten above freezing point is zero rated 

Will Brexit solve these anomalies?

According to Richard Asquith, VP Global Indirect Tax at Avalara, “The UK is bound by EU VAT rules until Brexit, although the potential two-year transition could extend this to 2021. Until this, such oddities will continue.” 

In other words, like it or not, chocolate Nesquik is exempt, strawberry and banana Nesquik are taxable. You simply have to swallow it, quickly if possible — like the Nesquik-swilling bunny in the commercials of my youth.

To learn more about how chocolate can impact taxability in Britain, check out the Tax advantages of chocolate-free gingerbread.

To better understand VAT and its application in Europe and elsewhere, check out Avalara VATlive.