VAT liability of coconut milk

A recent First-tier Tribunal case considered the VAT status of coconut water. In July 2011, the taxpayer in this case received a ruling from HMRC confirming that coconut water was zero-rated for VAT. However, HMRC reconsidered this ruling and in December 2011 wrote to the taxpayer withdrawing the ruling and confirming that coconut water was in fact standard rated. The taxpayer asked for a review and the ruling was upheld. It is this decision that the taxpayer appealed to the Tribunal.

The taxpayer sought to persuade the Tribunal that the coconut water produced by the company was a form of coconut milk. The Tribunal were clear that coconut water and coconut milk are two distinct products. Coconut water is the fluid found in immature green coconuts. The fluid is extracted from the coconut and packaged into tetrapak cartons for sale and the coconut water undergoes no processing other than pasteurisation. Coconut milk on the other hand, is prepared by squeezing grated coconut meat through a cheesecloth.

The zero-rated VAT treatment of coconut milk was found to have no bearing on the VAT treatment of coconut water. The coconut water was clearly marketed as a drink and the Tribunal used an earlier VAT Tribunal case to help demonstrate this fact. There is a special exclusion in the legislation which allows milk to be zero-rated, however the Tribunal held that the coconut water was not a type of milk and did not fall within any of the overriding exclusions underVATA 1994, Sch. 8, Grp. 1 that would allow the drink to be zero-rated. The taxpayer’s appeal was dismissed.

The Tribunal did comment that the taxpayer would have had a legitimate expectation that HMRC would abide by the first ruling that the drink was zero-rated until notice was given that the ruling was withdrawn.

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