HMRC has been successful before the Court of Appeal in their quest to tax Mega Marshmallows at 20% VAT. Regular size marshmallows are subject to 20% VAT as confectionery. However, those produced by Innovative Bites Limited, a wholesaler of American sweets and treats, are considerably larger than usual and are intended to be roasted over a campfire or barbecue, and then eaten or used as an ingredient in making s’mores. It was held by both the First-tier Tribunal and Upper Tribunal that these Mega Marshmallows are zero-rated. This case relates to more than £470,000 of overpaid VAT by Innovative Bites in relation to VAT periods from 2015 to 2019.
The marshmallow ruling
On 21st March 2025, the Court of Appeal ruled that further review is required by the First-tier Tribunal to determine whether the product is “sweetened prepared food which is normally eaten with the fingers” which, under Note 5 Schedule 8 Value Added Tax Act 1994, would result in the marshmallows being subject to 20% VAT as confectionery.
The Court of Appeal ruled that Innovative Bites failed to discharge the burden of proof that the marshmallows are not “normally eaten with the fingers” which, the Upper Tribunal had also stated, is for the taxpayer to demonstrate. If the marshmallows can be eaten with fingers, then they would be classified as sweets, subject to 20% VAT. It is now for the First-tier Tribunal to determine whether Mega Marshmallows are normally eaten with the fingers to determine the rate of VAT applicable to the product.
The First-tier Tribunal had originally found in favour of the appellant that Mega Marshmallows were not confectionery. The tribunal had focused on the product’s size, marketing and intended use, although the method of consumption was not considered in its analysis which will now need to be considered. This will likely take account of how the ordinary informed person on the street would consider consuming the marshmallows, whether with their fingers or off a skewer.
Whilst this is just one case, it goes to show the high complexity of applying the correct rate of VAT to food and beverages for human consumption in the UK and the importance of applying the right rate of VAT. Thankfully for Innovative Bites, this case concerns overpaid rather than underpaid VAT but highlights once again that an overhaul of the UK VAT rules around taxing food may be long overdue!
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