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I’ve been always been fascinated by the difference between cakes, biscuits and confectionery and had the pleasure of being part of the team that helped Tunnocks and Lees of Scotland win their case about Snowballs – it was, without doubt, the most fun two days I’ve spent in the Tribunal and I remain amazed at some of the stances HMRC will take in cases that I think are fairly obvious.

Of course, I am being slightly unfair. Determining the VAT status of some food products is tricky and involves balancing a number of different characteristics to come to a conclusion. This really is the area where it is most clear that VAT is an art not a science.

I was really excited therefore to see the decision in the case of Innovative Bites Limited v HMRC which was released on 4 April 2024.
The dispute centres around the VAT treatment of a seemingly innocuous treat: Mega Marshmallows. Innovative Bites Limited, the company behind these fluffy confections, found themselves before the Upper Tribunal (Tax and Chancery Chamber) following an appeal by HMRC against the First Tier Tribunal’s decision.

At the heart of the matter lies a fundamental question: Are Mega Marshmallows to be treated as confectionery, subject to standard-rated VAT, or do they fall under the zero-rated category as food? The answer hinges on the interpretation of Excepted Item 2 and Note 5 of Group 1 Schedule 8 to the Value Added Tax Act 1994.

HMRC’s Stance

HMRC contended that Mega Marshmallows should be classified as confectionery. Their reasoning rested on the product’s inherent sweetness, akin to traditional sweets. According to HMRC, the VAT treatment should align with the general perception of marshmallows as confectionery.

Innovative Bites’ Defence

Innovative Bites Limited, however, presented a compelling counterargument. They emphasized that Mega Marshmallows were not your run-of-the-mill confectionery. Instead, they were specifically designed for a unique purpose: roasting over an open flame. The marketing, packaging, and size of Mega Marshmallows all pointed toward this intended use.

The Tribunal’s Verdict

The Upper Tribunal upheld the First Tier Tribunal’s decision, ruling in favour of Innovative Bites. There were a basket of tests that it considered:

1. Marketing and Packaging: The Tribunal scrutinized the product’s marketing materials. Mega Marshmallows were positioned as ideal for campfires, barbecues, and cozy gatherings. The imagery depicted families roasting marshmallows over crackling flames—a far cry from the world of traditional confectionery.
2. Size Matters: Mega Marshmallows were notably larger than their sweet counterparts. Their substantial dimensions reinforced the notion that they were meant for roasting, not mere snacking.
3. Supermarket Placement: Looking at supermarket shelves showed that Mega Marshmallows were strategically placed alongside other barbecue essentials—charcoal, skewers, and firelighters. This contextual placement further supported their unique purpose.
4. Seasonal Sales: The surge in Mega Marshmallow sales during summer months—prime camping and outdoor cooking season—underscored their intended use.
5. Cooking process: “roasting the marshmallows gives them a different texture and flavour. “… Roasting larger marshmallows also gives a different result in terms of the ratio of crisp outer to soft inner mallow.” Roasting a marshmallow gives rise to a physical change in the product, caramelising the outer skin and making the interior molten.

The Tribunal agreed that Mega Marshmallows transcended the realm of mere sweets. Their specific design, marketing, and practical application tipped the scales in favour of zero-rating.

The decision sheds light on the nuanced interplay between tax law, marketing, and the delightful world of marshmallows. There is a basket of tests and whether a product is standard or zero-rated is often down to the weight that falls on one side of the scales rather than the other. These tests can be complicated, covering the manufacturing process, or really simple – after all, one of the reasons Jaffa Cakes are deemed to be cakes (leaving aside the usual “cakes go hard and biscuits go soft” trope) is that they are called “Jaffa Cakes” and not “Jaffa Biscuits”.

Getting this right can be really important for the profitability of a product line, and underlines why it is so important to take advice, and not necessarily just agree with HMRC.

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