A stubborn stance from the government over VAT is completely undermining its health policies and could cost the UK billions as the NHS creaks under the pressure of rising obesity, observers warn.
Innocent Drinks, the smoothie firm partly owned by Coca Cola, has lost a battle to reclaim VAT on its fruit drinks paid out since April 2007.
HMRC ruled this week that Innocent smoothies are classed as a luxury beverage and are subject to the 17.5 per cent tax, due to rise to 20 per cent on 1 January 2011.
The landmark judgement has been reached after a lengthy tax tribunal followed a petition to 10 Downing Street with 22,000 signatories and an early day motion backed by 59 MPs.
The case hung on the ability to prove that the drinks were being bought as a substitute for fresh produce rather than to quench thirst. Currently, milk, tea and hot chocolate are not taxed but other drinks and fruit juices are.
The ruling has caused outrage, with HMRC’s strict categorisation of the drinks - which are half pure fruit juice and half pulped fruit - dubbed a “nonsense”.
Grant Thornton director of agriculture Gary Markham told FPJ that to have “junk food” such as burgers and chips classed as essentials - and therefore exempt from VAT - while taxing such drinks flew in the face of government health policy.
Markham said: “If you look at the cost of obesity to the nation then VAT is a fringe issue in terms of raising funds and they have missed a landmark opportunity to make a stand on health. There needs to be a wider outlook than a purely legal view.”
Markham said a decision to introduce VAT on junk food would be economically beneficial but “politically impossible” as it would hit low earners and would take “a lot of bravado” to implement.
The court also put pressure on Innocent to remove its claim of containing two portions of the recommended 5 A DAY due to its pure fruit and fruit juice breakdown. The court ruled that fruit juice “almost entirely lacks the fibre present in fruit” - a point hotly contested by the company, which refuses to remove the statement.
Innocent co-founder Richard Reed said: “This ruling is definitely not in the interest of the nation’s health. 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.”
Tribunal judge Barbara Mosedale concluded: “We find that there is little evidence that people who buy smoothies would have bought fruit if smoothies were not available and indeed Innocent’s own perception of its product’s appeal is that there is a market for a product which makes fruit easy to consume because people don’t eat enough fruit.”
An HMRC spokesperson confirmed to FPJ that the decision was final and Innocent smoothies will be subject to 20 per cent VAT in January. Under current taxation rules, 35p of every 250ml £2 bottle goes to the Treasury, rising to 40p in the New Year.
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