19134

Value added tax – zero-rating – food – whether products were sweetened prepared food normally eaten with the fingers - no 

LONDON TRIBUNAL CENTRE

	ORGANIX BRANDS PLC	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	  Dr David Williams (Chairman)
						  John Robinson

Sitting in public in London on 26 and 27 January 2005 

Nigel Gibbon of Nigel Gibbon & Co solicitors for the Appellant

Mario Angelini of counsel, instructed by the Solicitor to HM Customs and Excise for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1	The sole question in this appeal is whether certain toddlers’ food products sold by the Appellant company as “Goodies Organic Fruit and Cereal Bars” are to be zero-rated for value added tax (VAT) purposes, or are to be subject to VAT at the standard rate. For some years the Appellant and its manufacturer relied on the view taken for the Commissioners that the products were zero-rated. After some doubt on the part of the Commissioners themselves, the Appellant has now been told that the bars are to be standard-rated. It does not agree and has appealed.

2	The Appellant provided the tribunal with samples of the food products, with full details of their contents, manufacture and sale, and described the philosophy behind the products’ creation and marketing. Evidence was given by Mrs Lizzie (Elizabeth) Vann, MBE, founder of the Appellant, and by Paula Smithson, B.Sc, M.Sc., Ph.D, a specialist microbiologist and the technical manager of the Appellant. The Commissioners did not call witnesses, but provided full documentation.  

The law

3	Taxable supplies are normally subject to VAT at the standard rate of 17.5% under the Value Added Tax Act 1994 (VATA), section 2. As an exception to this, food for human consumption is normally zero-rated (VATA section 30 and Schedule 8, Group 1, Item 1). As an exception to this, confectionery is normally standard-rated (Schedule 8, Group 1, excepted item 2). Note (5) to Group 1 provides:

	“…for the purposes of item 2 of the excepted items “confectionery” includes
chocolates, sweets and biscuits; drained glace or crystallised fruits; and any item of sweetened prepared food which is normally eaten with the fingers.”    

Only the words in bold are relevant to the current appeal. They clearly extend the definition of “confectionery” beyond its ordinary meaning. The words used are not further defined in the legislation. As zero-rating is not a European VAT concept, there is no underlying European element to the definition. The words are ordinary English words. The tribunal is looking at them in an extension to an exception to an exception to the general rule of taxability. It does not consider it should take either a deliberately broad or a deliberately narrow view of the words. 

The law

4	The tribunal welcomed the citation to it of the judgment of Lord Woolf, Master of the Rolls, in Customs and Excise Commissioners v Ferrero UK Ltd, [1997] STC 881, dealing with another part of Note (5) to Group 1. Having set out the text of the note, Lord Woolf commented:

The tribunal went into this issue as to whether or not the two products in question were biscuits or not in great detail. It gave a lengthy and carefully worded decision citing a number of authorities and tried to identify what are the characteristics of biscuits and also, because of certain of the authorities to which it was referred, other products. 

I commend the tribunal for the care it took over this matter, but I am bound to say that, no doubt because of the submissions which were made to it by the parties, the treatment of the issue which was before it was far more elaborate than was necessary. I do urge tribunals, when considering issues of this sort, not to be misled by authorities which are not more than authorities of fact into elevating issues of fact into questions of principle when it is not appropriate to do so on an inquiry such as this. The tribunal had to answer one question and one question only: was each of the products properly described as biscuits or not?

Later, in referring to the case law, Lord Woolf added:

Counsel who was representing the Commissioners cited eight previous cases before the tribunal. I have not had the advantage of reading those eight cases, but I have seen something of their contents from passages in the tribunal’s decision. It appears that most of those cases could be cases on their own facts. They should not be regarded as creating principles of law which are going to help on cases where the facts are different on an issue of this sort, which is one of fact and degree. 

This tribunal also had several decisions cited to it and lengthy submissions from both parties. It intends no disrespect to either party if, following the guidance from Lord Woolf, it does not set out every step of both arguments put to it. Lest it be thought otherwise, the tribunal did read each of the decisions put before it. But in the light of the guidance above it declines the invitation to adopt the approaches of the parties in trying to construct two or three sets of principles from those cases with which to approach this one. 

5	The parties argued that the tribunal should adopt two other general approaches to the decision: considering the intention of Parliament in making the legislation, and approaching the facts objectively.  

6	The parties agreed that under the Pepper v Hart rules (following the decision of the House of Lords in that case at [1993] AC 593 about the use of Parliamentary material in the interpretation of unclear legislative texts), it was appropriate to consider if the Parliamentary record helped establish the proper interpretation of the words. The tribunal was guided to the Budget Statement of the Chancellor of the Exchequer on 15 March 1988 (Hansard, HCD 6th Series, Session 1987-88, vol 129, col 1003). The Chancellor stated:

“I have one change to propose today affecting the coverage of value added tax, which will remain at 15 per cent. Confectionery was brought into VAT … in 1974 and the legal definition of confectionery goes back further still to the days of purchase tax. The emergence of new products has rendered this definition … somewhat obsolete. In particular, recent legal decisions mean that some cereal bars are subject to VAT, while others are not. I propose to clarify the law so that all cereal bars are taxed.”

7	This was followed by the Value Added Tax (Confectionery) Order 1988 (SI 1988 No 507) made that day. Article 2(b) of that Order added the words in paragraph 3 to the previous definition of “confectionery”. Its explanatory note echoes the Chancellor’s Budget statement. 

8	The tribunal does not find that to be of assistance. It agrees with Mr Gibbon that if the Article had specifically referred to cereal bars, then there would be no argument about its application to such bars. But the drafter chose another approach. And there is no ambiguity in the actual wording used by the drafter and adopted by Parliament that can be widened or restricted so that it can be applied to all cereal bars or only applied to cereal bars. Indeed, “cereal” and “bar” are not even mentioned. On the contrary, the failure of the Parliamentary material to assist our interpretation emphasises the absence of any other authoritative guide to further refinement of this difficult definition. There is a somewhat different formulation of words in the relevant Commissioners’ public notice, but neither party sought to gain assistance from that. The tribunal therefore disregards it, save that it notes that it does not use identical terms to the legislation itself. 

9 	So the words of the definition must be treated as a series of ordinary English words read together in the limited context of the definition. As Lord Woolf made clear in the judgment cited above about another part of the same definition, its application is a matter of fact, not of law.

The approaches to be taken 

10	The tribunal agrees with Mr Angiolini that there is a general principle that the tribunal should have in mind when making that decision of fact: it must take an objective view.  He submitted that VAT. VAT liability or exemption must apply evenly to objects regardless of what they are called, how they are described for other purposes such as marketing, and regardless of subjective issues such as the intention of the supplier. Mr Angoilini supported this by reference to the decision of the European Court of Justice in BLP Group plc v Customs and Excise Commissioners, Case C-4/94, [1997] STC 424. At paragraph 24 the Court emphasised that the approach is not to look to the intention of a party but “to the objective character of the transaction in question”. The tribunal regards that as a principle of United Kingdom tax law even aside from that authority. But it adds two riders. First, in considering the words in question, it is relevant to consider how the Appellant understands the words, and why it uses them, as part of the tribunal’s own search for the ordinary meaning. It takes the same view about the use of those words by others producing similar products. The fact that the Appellant, or any other producer, states that a product is “sweetened” or “unsweetened” is not decisive of the fact stated, but it is relevant to assessing the ordinary use of the term in that context.  Second, the test can only be objective if the language of the legislation is itself capable of objective application.  

11	The tribunal also agrees with Mr Angiolini that it is not for the tribunal to comment on decisions or administrative issues preceding the issue in question, or any administrative background to the decision save, again, in so far as that assists the tribunal in establishing the ordinary usage of the relevant language. In this case in viewing the possible range of meanings of the terms involved, it is relevant that the Commissioners at first regarded the bars as not sweetened, and that the Commissioners were later advised by their retail unit (to which the bars were sent for analysis) that it could not answer the question. The relevance is the same as that of the use of the language by the Appellant or other producers. It helps to establish what the words mean, and whether that meaning is clear or unclear. The tribunal understands the failure of the retail unit to advise to be also a failure to identify an objective way of answering the question it was asked. 

12	Both parties put much weight on the word “sweetened”. It is not a sharply focused word. Like many general adjectives, it has an inevitable penumbra of meaning around a core central meaning. Inconsistency from one person to another, or from one case to another, is to be predicted. There will be cases where one person states that something is sweetened where another would disagree. In that sense, the language of this particular legislation may make true objectivity impossible. As the Oxford English Dictionary puts it, “sweetened" means “made sweet in any sense” (with references to the entries on sweet and sweeten). The tribunal does not consider that it can take the linguistic analysis any further. It must decide whether the products are “prepared sweetened food normally eaten with the fingers”. 

The issues

13	It is not in dispute that the Appellant’s products are prepared food. Nor is it in dispute that the products are normally eaten with the fingers. For current purposes, the Appellant accepts that the target age of the consumers is not definitive of the meaning of “normally”, and that it is appropriate to disregard the age of the consumer. The tribunal was somewhat relieved to be told that, as from its own experience it was aware that the target consumers of these products – young children or toddlers – eat just about everything with their fingers. It had visions of having to include some kinds of fries, fish fingers, baked beans, jelly and a wide range of other foods within the definition of “confectionery” if read and applied literally. 

14	Both parties approached the case by asking the tribunal to decide whether the bars were or were not sweetened. The disputed question appears as a simple one: in that factual context are the food products also sweetened? As past decisions of this tribunal and the courts suggest, and as both parties agree, interpretation and application of this test is in practice anything but simple.  

The Appellant’s evidence 

15	The tribunal was asked to reach a decision about each of three fruit and cereal bars: apple and orange, apricot, and raspberry and apple. The tribunal noted the recipe from which each of the bars was made, and the analysis of contents as between sugars and other constituents of the food both in the recipes declared and on the labels of the individual bars produced in evidence to it. The analysis in standard form on the bars showed a “sugars” content in each 30g bar varying from 5.7g in the apricot bar to 8.2g in the raspberry and apple bar and 9.1g in the apple and orange bar. 

16	It also records its view on tasting each of the bars. Neither of the members of the tribunal regarded any of the bars as “sweet” as that member ordinarily understood the term. And, counterintuitively, both members separately thought that the “sweetest” bar was the one that was said on its wrapper to contain the least sugar. Both thought that the initial overall taste of the bar containing raspberry juice was faintly acidic rather than sweet, and that, in so far as the raspberry juice was concerned, the tribunal’s impression was that it was neither sweet nor sweetening. Finally, both members agreed that the aftertaste after tasting all the bars was separate again, being an aftertaste of the apricot in one of the bars that again was not “sweet”. The tasting highlighted the underlying question that both parties had sought to answer in argument before it in different ways, namely “sweetened as compared with what?” 

17	It was not disputed for the Commissioners, and the tribunal finds, that none of the products contained any processed or other added sugars or similar substances, such as honey, glucose or glucose syrup, or their artificial equivalents, or other additives. The tribunal also finds that, in so far as the products could be said to be “sweet” or “sweetened”, or the bars contained sugars, it was because that was an integral effect of one or more of the ingredients that formed the recipe for each bar. In that narrower sense of the term, the products were not sweetened. 

18	Dr Smithson, the Appellant’s expert in the field, gave full evidence about the design and creation of the bars and of their contents. The tribunal found her to be a convincing witness. She flatly refused, despite persistent cross-examination by Mr Angiolini, to accept that the bars were sweetened. She gave several factual reasons for this view. The first, not disputed by the Commissioners, was that the aim throughout had been to make a product with reduced, not added, sugar content. Dr Smithson gave evidence that the Appellant had sought to identify recipes for the products with a minimum of sugars – certainly less, she contended, than that in potentially rival products.  Mrs Vann also gave evidence about the approach taken by the Appellant to the inclusion of additives of any kind, and of any sugars, in its products. She confirmed that aspect of Dr. Smithson’s evidence. Again, we accept her evidence.

19	Dr Smithson told the tribunal that the most important consideration in her view that the products were not sweetened was that the Appellant had worked with its manufacturer in developing recipes that would constitute “bars” with a minimum of sugars content of any kind. It had done this by conducting experiments with differing ratios of the ingredients chosen for the bars (consisting of oats, coconut and various fruits, fruit extracts, and concentrates). An ingredient was altered by, say, a 1% increase in the recipe and another reduced by a similar amount to establish the consistency of the end product. What the Appellant found was that as the ratios of different ingredients shifted, there were certain windows of opportunity where the recipe would allow a bar to be formed. Within a window the combined ingredients could be turned into a bar. Outside a window the products could not be turned into a bar of any kind. They found that this did not directly relate to the juice concentrate content or the sugars content of the bar so formed but was a result of particular interactions of the ingredients under particular preparation conditions. 

20	She emphasised that the role of the juice concentrates within the recipes was threefold: they gave the fruit flavours to the products; they provided a binding agent so that the ingredients as a whole coalesced to form bars, and they gave the products an appropriate shelf life. This latter was because the juice concentrates created and maintained a level of water content in the bar so that it did not dry out or disintegrate after production. In other words, it ensured that the product not only became a bar during the manufacturing process but also remained one until sale and consumption. All these aspects of the inclusion of the juice concentrates meant that they were essential to the recipes used. Further, the precise amount of the juice concentrates in a recipe, as with other ingredients, was dictated by whether the overall recipe was within one of the windows that allowed a bar to form. In the absence of any juice concentrate in these products there would be no bar of the kind that the Appellant wished to produce consistently with its philosophy. She did not accept that the concentrates could be said to have been added to sweeten the bars. The juice concentrates were essential ingredients, not additions, and accordingly could not be said to have sweetened the products. 

21	Mr Gibbon supported that evidence by producing in evidence a mixture of all the ingredients in one of the bars save for the fruit concentrate. What was produced was clearly not “food which is normally eaten with the fingers”, but was more akin to breakfast muesli.       

The Commissioners’ submissions

22	Mr Angiolini took an opposite view of the facts. Both juice concentrates, and in particular the apple juice concentrate, consisted mainly of sugars. All three products contained apple juice concentrate. Consequently by adding the apply juice concentrate to the products the Appellant had sweetened them. The Commissioners adopted the same argument, though somewhat less forcefully, with regard to the raspberry juice concentrate added to one of the products. The answer given by the Commissioners to the question “sweetened as compared with what” is that it was as compared with the consistency of the main ingredients in the bar, namely oats and raisins, before taking the juice concentrates into account. An analysis of the Appellant’s evidence showed that the percentage of sugars as part of the total ingredients of all kinds in the bars after adding the two juice extracts was higher than before adding the juice concentrates. Consequently, the products had more sugar in them than without the juice concentrate, were therefore sweeter, and were therefore sweetened. This must follow objectively, Mr Angiolini submitted, from the evidence of the Appellant company. 

23	Mr Angiolini supported this by reference to evidence in other tribunal cases about sweetened products and by assertions about the nature of apple juice concentrate. The tribunal was not assisted by the assertion that there is much more sugar in apple juice concentrate than in unconcentrated apple juice. As Dr Smithson confirmed in evidence, that simply expressed the fact that water had been removed. It would depend how the water was removed in a particular concentrate as to whether other elements in the unconcentrated juice were also removed. The tribunal found as fact that the apple juice concentrate used was about 2/3 natural sugars and 1/3 water and other material. Nor could the tribunal see what difference it made that the water was removed before adding the ingredient rather than as part of the preparation process. Presumably similar comments could be made about dried fruit such as apricots and raisins, also included in the bars, but the tribunal did not explore those issues. 

24	Mr Angiolini drew on the evidence recorded in the tribunal decision in W Jordan (Cereals) Ltd v Customs and Excise Commissioners, (1988) VAT Decision 3275, that the relative degrees of sweetness of sugar substances compared with sucrose showed that fructose, the main form of sugar in a juice concentrate, was 73% sweeter than sucrose. Dr Smithson accepted that fructose was the main natural sugar in the juice concentrates. The tribunal records concern at any attempt to apply that evidence to this case. In that case it appears from the decision that even the Appellant company considered that the bars had been sweetened. More to the point, the table of comparability of sweetnesses to which Mr Angiolini drew attention is not attributed to any source. Nor is it clear on what it is based save that it appears to be some kind of generalised subjective judgment. Further, the sugars in that case were included in the products as separate ingredients, not as here as a naturally integral part of other ingredients. With reference to the raspberry juice in particular, this tribunal considers that any attempt to compare sweetness of an ingredient should also include any other of the essential elements of taste in an ingredient, namely saltiness, sourness, and bitterness. That, in the tribunal’s view, is an essential difference in considering the result of adding processed sugar to a recipe as against including an ingredient part of which is one or more forms of sugar. On what appears from that decision to be the objective of the table, the proper comparison for current purposes is with the perceived taste of apple juice concentrate or of raspberry juice concentrate as compared with sucrose on its own, not of elements of that juice tasted in isolation. And from its own observations the tribunal would expect the raspberry juice concentrate to be listed as far from sweet in such a comparison. 

25	The tribunal finds little assistance from the other cases cited to it. In several of them the ingredients questioned by the Commissioners were either sugars or, in the final analysis, “obviously sweet”, deliberately added as a sweetener, or such that their addition did not sweeten something that was already naturally very sweet. While recalling Lord Woolf’s words of warning, two analogous cases on the facts are Brewhurst Health Food Supplies v Customs and Excise Commissioners (1992) VAT decision 8928 and SIS Ltd v Customs and Excise Commissioners (2001) VAT decision 17116. Brewhurst concerned cubes of dried fruit in which molasses was added as a binding agent but also acted as a low grade sweetener. The cubes were sold as a laxative rather than a food. The tribunal found that it could not overlook the purpose for which the cubes were sold and that the cubes were not food. It also accepted the evidence that the molasses was added as a binding agent, and that adding it did not sweeten the product because the figs in the product already meant that the product was sufficiently sweet to make it unnecessary for the cube to be sweetened.

26	 SIS Ltd concerned products described as fruit and cereal bars with added vitamins and minerals, intended for a specialist sports market. Grape juice (or, this tribunal assumes, grape juice concentrate) was an ingredient of every bar. It was added because without it the bars were too sweet and too hard. It was added to replace apple juice in a previous recipe for a number of reasons. The tribunal accepted that the grape juice was added for various reasons including its antioxidant properties, its freedom from sorbitol, and as protection against viruses. But in its conclusion the tribunal agreed with submissions based on other decisions that the purpose for which the grape juice was added was irrelevant. It found the grape juice to be a purely natural fruit product. It found that adding the grape juice produced a bar that was less sweet than the previous product and that adding the juice did not sweeten the bar. It also found that the main ingredient of the bar was sufficiently sweet to make it unnecessary for the bar to be sweetened. 

27	The tribunal finds limited assistance in these cases, not least because they appear to take contradictory approaches on the issue of the inclusion of individual ingredients in the overall product. It also notes that the tribunal in SIS Ltd itself considered its decision of doubtful use as a precedent, and that Mr Angiolini sought both to distinguish it on its facts and to criticise its conclusions on the law.       

The decision

28	The tribunal accepts the Appellant’s evidence that the two juice concentrates perform three necessary functions in the bars: to combine with the other ingredients to turn the whole into something that can be constituted as bars that can normally be eaten with the fingers; to flavour the products with fruit flavours as indicated in the product names (whether in doing so it is sweet, sour, bitter, or salt); and to give the bars so formed the right continuing consistency with regard to moisture content so that they remain bars. 

29	The most important aspect of including the concentrates in the product recipes in the precise amounts used is that they result in the ingredients as a whole coalescing in such a way that bars can be formed without adding any processed or artificial ingredients. For present purposes, but also for marketing purposes, if the ingredients together did not form bars, then they would not be food products normally eaten with the fingers. Further, they must remain in that form until retail sale at least. 

30	When the tribunal asks itself the question “sweetened as compared with what?” it does not accept the argument for the Commissioners that it means more sweet compared with what Mr Angiolini termed in argument the “main” ingredients: the oats and the raisins (and in one product the apricots). The evidence clearly showed that the “main” ingredients of themselves could not be used to produce food of a kind “normally eaten with the fingers”. The tribunal therefore rejects the approach adopted by the Commissioners of contending that the juice concentrates were added to the other ingredients. The Appellant’s evidence satisfied the tribunal that the recipes used for these bars were such that had the juice concentrates at the chosen levels not been used there would have been no bars. There is therefore in the tribunal’s view no valid comparison for current purposes to a recipe without the concentrates. There is therefore no need to explore Mr Gibbon’s argument that the comparison in sweetness terms, at least in one of the bars, should be with the raisins because they were the “main” ingredient. 

31	This is not a case where any specific ingredient is “added” to the recipe, whether or not for the specific purpose of sweetening the product. And it is not a case where the products include processed sugar, glucose, honey or any other similar pure sugars product, or any artificial sweetening equivalent or other additive in the recipe in isolation, regardless of the reason for the addition. 

32	The tribunal recorded above that it takes the view that none of the products were “sweet” and that, in so far as it was able to tell from tasting, the raspberry juice concentrate was not “sweet” of itself.  It also considers that it should form a view on the inclusion in the products of the juice concentrates as a whole, not by isolating sugar content from the rest of the contents and ignoring any other effect of those concentrates. It must also form its view on the inclusion – not addition – of the juice concentrates in the recipe as an essential part of the whole. 

33	On that basis, the tribunal finds as fact that none of the bars are “items of sweetened prepared food which is normally eaten with the fingers” within the definition in note (5) to excepted item 2 of Group 1 of Schedule 8 to the VATA. The appeal is therefore allowed. 

David Williams
CHAIRMAN

RELEASED: 5  May 2005

LON/