UK tribunal clarifies Covid-era legislation that excluded cider from drinks definition

The case centres on the Value Added Tax (Reduced Rate) (Hospitality and Tourism) (Coronavirus) Order 2020 that was introduced in July 2020 during the Covid-19 lockdown and brought in a reduced rate of VAT for certain supplies of food and drink in restaurants and catering services.

The reduced 5% rate, down from the usual 20% rate, applied to certain food products and non-alcoholic beverages sold in restaurants, pubs, bars and cafés from 15 July 2020 to 30 September 2021 in a bid to support those businesses severely affected by forced closures and social distancing measures during lockdown. A temporary reduced rate of 12.5% was later applied to the same products from 1 October 2021 to 31 March 2022 to provide the hospitality sector with some further tax relief.

Under the 2020 order, “alcoholic beverages” – defined as spirits, beer, wine or made-wine – were all excluded from the reduced VAT rate and were taxed at the usual rate. However, the wording did not refer explicitly to cider, making it unclear at the time whether cider products could avail of the reduced VAT rate. 

A dispute (72-page / 764KB PDF) arose when JD Wetherspoon plc later submitted a claim for overpaid VAT for supplies of cider made between 15 July 2020 to 31 March 2022, arguing that the reduced 5% rate should have applied to cider over this period. After HMRC rejected the claim, the London-listed pub chain appealed to the FTT for clarity on the legislation.

In the judgment, handed down on 17 April, the FTT held that cider was not within the scope of the reduced VAT rate because the tribunal could be “abundantly sure that the purpose of the House of Commons as the relevant legislator was to include cider in the definition [of excluded beverages] and that, by inadvertence, the draftsman (HMT) and the House of Commons failed to give effect to that purpose.”

In reaching this conclusion the FTT applied the so-called Inco principle, which was established in a 2000 House of Lords case Inco Europe Ltd v First Choice Distribution and permits courts to rectify obvious drafting errors in legislative instruments under certain circumstances. This principle is applied to ensure that the true intention of the legislator is given effect, even if this means deviating from the wording laid out in the statute.

Jake Landman, tax expert at Pinsent Masons, said the decision could have tax implications for businesses across the retail and hospitality sectors that may have made similar claims against HMRC. “The case provides an illustration of when the tribunal will apply the Inco principle to address issues in the legislative drafting even in the case of tax statute which is typically strictly applied,” he said.

The FTT also considered a further argument raised by HMRC based on UK legislation’s compliance with EU law. Although the European Communities Act 1972 was repealed on 31 January 2020 when the UK formally left the EU, the FTT confirmed that “EU law and the principles of EU law continued to apply in relation to the provision of UK law” during the period in which the reduced rate was applicable.

Consequently, the FTT said over this period that EU law required certain different types of cider to be treated the same for VAT purposes in order to uphold the EU principle of fiscal neutrality that similar products are taxed in the same way. The FTT agreed with HMRC that if the reduced VAT rate were to be applied to standard cider then this would create disparity with certain higher strength ciders which were sufficiently similar to a consumer.

“It is interesting that HMRC chose to argue that the UK legislation was contrary to EU law,” said Bryn Reynolds, tax expert at Pinsent Masons. “Indeed, the tribunal’s comments suggested it found this surprising and suggested that an alternative conforming interpretation for the purposes of fiscal neutrality could have been to apply the reduced rate to all other alcoholic beverages in addition to cider. Thankfully for HMRC, the tribunal determined that the appropriate conforming interpretation was to add a reference to cider in alignment with the domestic remedy.”