The hipster drink company had challenged its tax bill by pulling out the argument that its smoothies were a ‘liquefied fruit salad’, not a ‘beverage’. The fact that it blatantly is a beverage apparently never entered into it.
Earlier this year the company showed the size of its pips by trying to claim back the VAT charged on three years’ worth of smoothie sales, writing to HMRC asking for a multi-million pound refund. It took its case to a tax tribunal this summer, fighting on two fronts: first saying it was unfair that the government charges VAT on its smoothies – they’re 100% fruit, which in its raw state isn’t subject to VAT. Then it added that it was counter-intuitive to charge VAT on ‘healthy’ products, while burgers and chips get off VAT-free.
Needless to say the tax tribunal reacted like someone being shown a pineapple for the first time. It chucked the argument out. Though VAT is not charged on most foods and some drinks, anything classed as a ‘beverage’ will automatically attract VAT at the standard rate. Innocent’s argument certainly seems like easy pickings.
While consumers pay no VAT on ‘essential’ foods and drinks, you do have to pay on ‘luxury’ items. The clue is in the V of VAT: anything that adds value to the basic process is liable to tax. While Innocent may argue that it’s just fruit, it has been processed and packaged and made to look trendy and nice. That’s what sells it, and also what allows the company to make an incredible mark-up on stuff that does the job perfectly well when pulled straight from bushes and trees.
For the record, according to the HMRC definition the word 'beverage' covers any 'liquid commonly consumed to increase bodily liquid levels, to slake thirst, to fortify or to give pleasure'. And yet milk, tea and hot chocolate don't come under that umbrella when it comes to VAT. So you can see why Innocent thought it had a chance.
Of course, HMRC is often getting pulled up for its definitions. M&S fought over the status of teacakes, McVities for Jaffa Cakes. P&G even managed to argue successfully that Pringles weren’t crisps, because they contain only 42% potato. This despite saying ‘potato crisps’ on the container. One for trades descriptions then, surely.
‘This ruling is definitely not in the interest of the nation's health,’ said Innocent’s soured CEO, Richard Reed. ‘It's absurd that smoothies, which contain two portions of fruit and help people live more healthily are subject to VAT at full rate when junk food like burgers, chips and doughnuts are sold tax free.’
You have to support his argument in theory – such a taxation system would work wonders for health, which is of course a massive issue. Trouble is, HMRC’s job is to set and collect tax, not regulate people’s calorie intake. That’s a strong argument for joined up government perhaps – something for the Coalition to think about in its drive to cut costs.
So this will go down as a noble yet vain attempt by a company to extract a few juicy quid by squeezing the system. And yet if it really is so concerned about improving people’s health, there is still something it could do: shaving some of the margin it makes on its liquefied fruit salads, for starters.