VAT on dietary supplements – do you have skin in the game?

Another week brings another development on the VAT position of food products. This time, the First-tier Tax Tribunal (FTT) has been asked to rule on a dispute with HMRC over the correct VAT treatment of Skinade, a liquid collagen supplement designed to promote skincare. 

The Bottled Science case

Skinade aims to stimulate the body’s natural production of collagen, which begins to decline after the age of 23, often leading to drying and loss of elasticity of the skin. The product is available in 150ml bottles or liquid travel sachets and intended to be consumed once a day, as part of a 90-day course.  The manufacturer, Bottled Science Ltd, developed this award-winning product as a liquid because it is easier to consume than tablets or powders and allows better absorption of the ingredients, which include fish collagen protein and flaxseed oil, along with vitamins and grape juice to make it palatable as a drink. 

Skinade is sold to the public via Bottled Science’s website or through cosmetic clinics, beauty salons, dentists and private medical practices. It is not available on the high street or through other online retailers.  

Bottled Science took the view that Skinade should be zero-rated because it was a food supplement sold in liquid form. It argued that the product had nutritional value, with all of its ingredients being food items which would be zero-rated if sold on their own. The small bottles are similar to probiotics or turmeric and ginger shots, which come in small single dose bottles and are generally zero-rated as food for VAT purposes. 

However, HMRC decided that Skinade was not food, and was instead a beauty product, subject to VAT at 20%. The dispute, involving tax of £1.2m on products sold over a four-year period, came before the FTT, which agreed with HMRC that Skinade could not be zero-rated as food.  

Its reasoning was primarily based on the marketing and packaging of the product. The FTT thought that Skinade did not look like something to be found in the food aisle of a supermarket, with its white packaging and scientific-looking logos appearing more akin to an item sold in a chemist shop. It is marketed on websites and at trade shows aimed at the beauty industry and is not available through food retailers. Plus, Skinade’s awards came from the beauty industry rather than the food industry. 

The FTT also considered the nutritional content of Skinade, which it accepted was a factor relevant to the VAT position. However, while it agreed that Skinade clearly had nutritional properties, the FTT found it was a product with a relatively low nutritional value whose primary purpose was not normally associated with food. According to the tribunal, Skinade was not consumed in order to ‘keep the body alive or to enable it to function and develop’. Instead, it is a product distributed and marketed in different way from food to help people keep their skin looking young. 

Finally, the FTT took the general view that the VAT position of food items should be based on whether the finished product is food, not whether its individual ingredients are food or food ingredients.

What does this mean for food manufacturers? 

Food and nutrition are now being consumed in many more ways than could be imagined when the VAT legislation was created over 50 years ago, so it’s likely the UK’s £1.6bn vitamin and food supplements market will be disappointed by the lack of flexibility in the rules and inconsistent rulings in the courts. Similar difficulties have been experienced by the snack food industry – as shown in our recent article: Rocky road for snack manufacturers on VAT treatment. In the case of an item like Skinade, whose ingredients are all recognised as foods in their own right, it feels particularly harsh to say that the resultant product is not food. 

The FTT admits that its decision in Bottled Science was finely balanced, so it is quite possible that the case will be appealed again to the Upper Tribunal. Meanwhile, even if this dispute goes no further, we understand that more appeals are on their way to the tribunal which, depending on the result, might lead to claim opportunities for other vitamin and supplement manufacturers, or inspire further scrutiny of VAT accounting in the sector by HMRC. Therefore, now is a good time to review the VAT position of your products to make sure you are ready for further developments.