VAT Squished

A food company has secured a legal victory against UK tax authorities by successfully arguing that its marshmallows should not be subject to VAT as they are not classified as confectionery.

The UK tax authority, HMRC, appealed a 2022 decision by the first-tier tribunal (FTT) that exempted Innovative Bites Ltd from a £472,928 VAT demand on its “Mega Marshmallows.” The higher tribunal upheld the FTT’s decision, reasoning that these marshmallows were marketed and sold specifically for roasting and thus fell outside the scope of confectionery taxation.

Under VAT rules, confectionery is taxed at 20%, encompassing “sweetened prepared food typically eaten with the fingers.” HMRC argued that this description applied to Mega Marshmallows. Charlotte Brown, representing HMRC in the upper-tier tribunal, contended that the FTT failed to adequately consider the method of consumption, noting that regular-sized marshmallows are taxed at the standard 20% rate.

However, Tim Brown, representing Innovative Bites, drew parallels with cooking chocolate and small marshmallows, which are treated as cooking ingredients and not subject to VAT.

The judges ultimately sided with the FTT’s perspective, acknowledging that unroasted marshmallows might be consumed with fingers or cut for young children, but once roasted, they could be eaten in various ways, diminishing the significance of the means of consumption.

In their written judgment, appeal judges Phyllis Ramshaw and Nicholas Aleksander emphasized that the product’s intended cooking process before consumption was crucial in determining its classification. They rejected the notion that roasting merely heats the marshmallow, highlighting the significant textural and flavor changes that occur, such as caramelization and molten interiors.

The judges also found merit in the argument that more Mega Marshmallows were consumed during warmer months, suggesting a higher likelihood of roasting, which further supported their decision.

Original article can be found in The Guardian.

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