Giant marshmallows beat second £470k VAT appeal

Giant marshmallows beat second £470k VAT appeal

Apr 16, 2024

HMRC has lost a long running case over the VAT status of giant marshmallows with the Upper Tribunal ruling that they are not confectionery

Innovative Bites has won its appeal over a disputed VAT bill for £472,928 as tribunal agreed that the giant mallows are not subject to the standard VAT rate as they are designed to be roasted over a fire.

At the Upper Tribunal, HMRC appealed the decision from the First Tier Tribunal (FTT), rejecting the company’s claim that the snacks were not confectionery.

Innovative Bites claimed that the marshmallows would mostly be sold in the summer months, in the BBQ sections of the supermarkets they were sold in as they were intended to be roasted over a fire or barbecue.

The Upper Tribunal agreed with the FTT that in the years 2019 to 2021, 65% of sales of the product occurred in the period May to October.

However, HMRC rejected this view, issuing statements of £472,928 in 2019 for VAT periods between 2015 and used 2019.

Supplies of food of a kind used for human consumption are zero-rated for VAT, under section 8 Value Added Tax Act 1994 (VATA). The FTT concluded mega marshmallows fell into this category due to it falling in Excepted Item 2 in Note 5.

The Upper Tribunal disagreed, saying: ‘We conclude that Note 5 is not a deeming provision.’

Note 5 is a list of items which fall into the confectionery category and does not describe items in depth, but states the items are ‘normally eaten with the fingers’.

HMRC raised several new arguments at the appeal. The first was that ‘the FTT erred in misapplying Note 5’. Charlotte Brown, representative for HMRC argued that ‘if at first glance a product falls within a certain category then it must be placed in it’, referring to sweets and ‘any item of sweetened prepared food’ in Note 5.

Brown’s second ground for HMRC was that ‘the FTT erred in law and fact by placing undue weight on the marketing of the Mega Marshmallows. Marketing is only a factor to be considered where there is evidence that consumers used Mega Marshmallows for the marketed purpose’.

Images of the marshmallows in supermarkets placed down confectionery aisles were also used as evidence, which the Upper Tribunal disregarded, saying the image in Waitrose in a ‘grocery’ section was in a neutral location. One image, taken in a Tesco was of a different brand of smaller marshmallows.

Judge Phyllis Ramshaw said: ‘There is no material error of law in the FTT’s analysis of the evidence and the weight it afforded to the evidence.’

The appeal was dismissed at the Upper Tribunal.

An HMRC spokesperson told Accountancy Daily: ‘We’re considering the Upper Tribunal’s decision.’

Glyn Edwards, VAT director at MHA said: ‘Everyone’s favourite tax case involving outsized marshmallows has finally been decided in the producer’s favour. Size (and packaging) it seems is important and Giant Marshmallows will continue to be zero rated. HMRC had already accepted that ‘tiny’ marshmallows are zero-rated as cooking ingredients, so only ‘normal’ sized ones will now be liable to 20% VAT.’