Judgment summary
Minerva Research Labs Limited produces and sells a range of collagen-based drinks ("the Products"). It submitted a claim for overdeclared output VAT for periods 01/18 to 01/22 on the basis that the Products were zero-rated as food but had been wrongly accounted for at the standard rate (1). The claim was originally £3,847,483.06 but reduced to £3,637,653.93 because the Appellant was out of time to claim for period 01/18 (1).
The sole issue for determination was whether the Products were 'food of a kind used for human consumption' and so zero-rated under Item 1, Group 1, Schedule 8 to the Value Added Tax Act 1994 (2). The Tribunal applied a multi-factorial test, common ground between the parties, and concluded that the Products were not food, dismissing the appeal and upholding HMRC's decision (3).
Background
Mr Sanguinetti founded Minerva in 2009 after becoming interested in collagen-based products for anti-ageing purposes, having travelled to Japan where collagen drinks were sold (70-72). Gold Collagen Pure launched in the UK in 2011, and Minerva has since developed 18 Products at issue, all based on hydrolysed marine or bovine collagen, sold in monodose, multidose and superdose formats (73, 81).
Minerva submitted an error correction notice for overdeclared output VAT for periods 01/18 to 01/22 on the basis the Products were zero-rated food (74). HMRC refused the claim, concluding the Products were 'predominately held out for sale as a health and beauty supplement' (74). On statutory review, HMRC upheld the decision, noting that 'although there are nutritional benefits, the drinks are primarily taken by the consumer for their anti-ageing properties' (74).
Core dispute
The sole issue was whether the Products fell within Item 1, Group 1, Schedule 8 VATA as 'food of a kind used for human consumption', and so qualified for zero-rating, or whether they were properly standard-rated (2, 6). It was common ground that the Products were not excluded as 'beverages' (8), and that the Tribunal had to apply a multi-factorial assessment rather than any alternative legal test based on Note 1 to Group 1 or on Staatssecretaris van Financiën v X (Case X) (9).
The parties disagreed on the weight to be given to how the Products were held out for sale and marketed, and on the relevance of the purpose for which purchasers consumed them (37, 59-65). The Appellant also sought, late in the hearing, to argue that the strict approach to interpreting zero-rating derived from EU law standstill principles no longer applied post-Brexit; the Tribunal refused permission to raise this new submission (15-18).
Court findings
The Tribunal held that dictionary definitions of 'food' added little (28), and accepted, following Macphie, that 'food of a kind used for human consumption' includes preparations or ingredients requiring further processing (41-43). Following Fluff and The Core, the Tribunal held that how a product is held out for sale is always a relevant factor, capable of carrying significant or even dominant weight, and that there is no clear distinction between 'classification' and 'dual use' cases (52-58). The purpose of consumption, evidenced by actual use and not merely marketing, was also a relevant factor (62-65).
On the facts, the Tribunal found the Products provide nourishment, supplying between 6% and 23% of daily protein requirements, and are marketed as offering nourishment for skin, hair, nails and joints (93-97, 142-145). However, the Tribunal found the Products are predominantly held out for sale as 'liquid beauty supplements', purchased by consumers for cosmetic and anti-ageing reasons rather than for protein or energy, given the availability of far cheaper sources of both (125, 146, 161).
The Tribunal found several features indicative of a medicine rather than a food: the consistent use of the words 'dose' and 'treatment'; description of the Products as 'clinically tested' and sometimes 'clinically formulated'; advice to take them on an empty stomach; warnings to consult a doctor if pregnant, breastfeeding or on medication; age restrictions on sale; and the significant role of pharmacies as outlets (156, 161). The Products were not marketed as a replacement for a meal or snack, and although sold via some outlets that also sell food, they were not positioned alongside food products (156, 128).
The Tribunal placed some weight on the historical use of bone broth and gelatine, both derived from collagen, as food, and on the palatability and liquid form of the Products, but found these outweighed by the factors on the standard-rated side (147-154, 160-161). The Tribunal distinguished the earlier decision in Arthro Vite, noting it predated Fluff's analysis and concerned 'edible gelatine' rather than processed collagen (165-173), and found Bottled Science, concerning a similar collagen drink 'Skinade', consistent with its own conclusion notwithstanding some factual differences (174-179).
Outcome
The Tribunal held that, on the multi-factorial assessment, the Products are not 'food of a kind used for human consumption' within Item 1, Group 1, Schedule 8 VATA (163). The appeal was refused and HMRC's decision was upheld (3).
Major issues / areas of contention
- Whether Minerva's collagen-based drinks constituted 'food of a kind used for human consumption' under Item 1, Group 1, Schedule 8 VATA, entitling them to zero-rating.
- Whether the Products were excepted as 'beverages'; this was not disputed by the parties and was not considered by the Tribunal.
- What weight should be given to how the Products were held out for sale and marketed in the multi-factorial assessment.
- Whether the purpose for which purchasers consumed the Products was a relevant factor in classification.
- Whether the Appellant could raise, for the first time at the substantive hearing, a submission that the post-Brexit position altered the strict approach to interpreting zero-rating derived from the EU standstill provision.
- How the Products compared with historical foodstuffs derived from collagen, namely bone broth and gelatine.
- Whether earlier decisions on collagen products, Arthro Vite and Bottled Science, assisted or bound the Tribunal's conclusion.