It may be the silly season, but the story that has been rumbling on about VAT on Marks and Spencer's tea cakes has to be one of the more ludicrous narratives the industry has encountered, any time of year. We first covered this tale of tax woe in March (A VAT lot of difference, The Grocer, 18 March 2006, p42) and despite making the news in the nationals this week, the story really hasn't changed much since then. Marks and Spencer is still trying to get its VAT back and HM Revenue & Customs is still reluctant to oblige.

What has changed, however, is awareness of the inconsistency

of the law regarding VAT. If the Marks and Spencer appeal succeeds, it could prompt a landslide of applications from other businesses that feel they have been or are being similarly unfairly charged - particularly, it seems, from smoothie manufacturers.

Jamie Mitchell, marketing director at Innocent Drinks, is in the early throes of setting up a consortium to lobby the Treasury to alter the law. He says: "If you zero rate smoothies and pure juices you can take 17.5% off the price straight away. That could increase sales by some 15%, equivalent to an additional half a billion portions of fruit consumption each year."

That would contribute nicely to the government's five-a-day agenda. The challenge though is to convince the Treasury that ­suppliers and retailers would drop their prices proportionally. Hence the need for a consortium. Mitchell says that collaboration with the likes of Tropicana, PJ Smoothies and supermarkets would not only bring clout to the cause but would also give credence to their part of the bargain. Unilever is also in discussion with HMRC about the possibility of getting a zero rating for its Vie smoothies.

Smoothie manufacturers are spearheading this revolution for good reason. Fruit is not taxed, but juice the fruit, put it in a bottle and suddenly it is. Secondly, the legal definition of a smoothie appears to be wrong.

Generally, food is not taxed. However, non-essential or luxury foods are. These luxury foods include chocolate-coated biscuits, ice cream and beverages, like smoothies, drunk to "increase bodily fluid levels" or to "slake one's thirst".

Mitchell argues that the primary reason people drink smoothies is to get healthy fruit portions into their diet and smoothies should therefore be reclassified: "It's the common sense view that a smoothie is not a beverage.

"But common sense may not prevail when customs is trying to protect its revenue. The key will be to convince the Treasury that people use smoothies to get one of their five-a-day."

A spokesman for Unilever echoes this view: "It's contradictory that a fruit and vegetable shot like Vie is not VAT exempt. The removal of VAT on innovative products like Vie can only act as an incentive to other manufacturers."

Unilever will be watching closely. If Mitchell is successful you can be sure plenty of others will try to follow suit. However, he faces several challenges. VAT policy changes require sign-off from the European Commission and changes need to be applied to all member states. That isn't easy.

Plus, HMRC doesn't like to give revenue away. Campbell's V8 fruit drinks and McCoy's crisps are just two suppliers that have recently tried, and failed, to get zero rating.

A spokesman for the Treasury says: "A smoothie will always be defined as a beverage because you drink it. Some milk-based smoothies are zero rated because milk is exempt from VAT under EU law. But any changes in VAT policy need to go through the EU."

If the Marks and Spencer case is anything to go by Mitchell's ­struggle will be long and hard. Marks and Spencer doesn't expect a result to this case, which started in 1994, for at least another year, and the arguments have now moved from what would appear to be the main point - that Marks and Spencer paid tax that it shouldn't have - to the legal vagaries of domestic versus Community law and unjust enrichment.

Peter Mason, a VAT consultant

at law practice CMS Cameron McKenna, says: "Judges can sometimes pick up on higher-level principles of the law, so once you're fighting with them you can often win. But this case is still going to go on for ages."

Perhaps the most sorry aspect of this case is that those who paid most of the VAT, the consumers, won't see anything returned. It's also their taxes that have paid HMRC's court costs.

Nevertheless, the sooner this VAT debacle is cleared up the better, and it will take people like Mitchell to see it through.

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