CoA: Mega Marshmallow VAT treatment hangs on whether they are ‘eaten with fingers’

Bryn Reynolds, VAT expert at Pinsent Masons, was commenting on the Court of Appeal’s ruling concerning the VAT treatment for a food product called Mega Marshmallows, sold by Innovative Bites. Mega Marshmallows are larger marshmallows sold specifically for roasting over an open fire, in packaging that marketed the product for roasting and included roasting instructions. The court considered whether the product should be classified as ‘confectionery’ and subject to standard-rated VAT under the UK’s Value Added Tax Act 1994.

The court found that if a product is a sweetened prepared food usually “eaten with fingers”, it is considered ‘confectionery’ and subject to standard-rated VAT, unless applying this rule leads to absurd results. However, it considered that this factual question – whether they are “normally” eaten with the fingers - had not been determined by the First-tier Tribunal (FTT) and so remitted it back to a different panel to be considered again.

“To highlight the absurdity of the VAT rules surrounding food, prior to this judgment, you could line up 30 marshmallows in size from ‘micro’ to ‘giant’. The smallest marshmallows are zero-rated for VAT, as ingredients. The medium sized ones were subject to VAT. Then the larger ones returned to zero-rating as they would no longer be typically eaten with the fingers. The taxpayer in this instance may well consider that the remittance of the case is simply an invitation to return to HMRC with a bigger marshmallow,” said Reynolds.

The definition of confectionery is at the centre of the argument. Schedule 8 of the VAT Act sets out the products that are zero-rated for VAT purposes. These include “food of a kind used for human consumption”, but there are a number of “excepted items”, including confectionery, which are treated as standard rated.

Note 5 to Group 1 of Schedule 8 describes confectionery as including “chocolates, sweets and biscuits; drained, glace or crystallised fruits; and any item of sweetened prepared food which is normally eaten with the fingers”.

In the initial hearing, the FTT found that Mega Marshmallows were not confectionery for a number of reasons, including that they were intended for roasting before eating. The Upper Tribunal dismissed an appeal by HM Revenue and Customs (HMRC) and held that Note 5 is an inclusive definition, which clarifies to avoid doubt but is not a deeming provision. It also noted that Note 5 is a rebuttable presumption, meaning if something falls within its description it will be treated as confectionery unless other factors outweigh the presumption.

HMRC then challenged the Upper Tribunal’s decision in the Court of Appeal. The higher court agreed with the Upper Tribunal that Note 5 operates as an inclusive definition, but disagreed on the rebuttable nature of the classification. It ruled that the statutory wording and section 96(9) of the VAT Act indicate that products described in Note 5 are definitively 'confectionery' for VAT purposes, subject only to avoiding absurdity. It confirmed that the definition is conclusive.

Lord Justice Males, in the secondary judgment, added that Note 5 is not an exhaustive list and that “a product will still be confectionery, and therefore standard-rated, if it would be regarded as confectionery within the ordinary meaning of that term as understood by an ordinary person”. However, in this case, this wasn’t an option for HMRC, as the FTT concluded that the product was not confectionery primarily because it was intended to be roasted before being eaten.

The Court of Appeal allowed HMRC’s appeal and remitted the case to the FTT. The need to remit the case arose from the fact that the FTT had not conclusively determined the question of how Mega Marshmallows are normally eaten, because it had concluded erroneously that it was not a necessary factor. The court also commented that the burden of proof lies on the taxpayer, who has to prove that the product is not normally eaten with the fingers and therefore falls to be zero-rated.

“The abundance of recent food cases show that this is an area of significant interest for HMRC. Any new product under development should be considering the potential VAT treatment very carefully as the treatment can often hinge on small details,” said Reynolds.