HMRC Under Fire for VAT Bill on S’mores Marshmallows

By: Kiarra M. Strocko

A British food wholesaler of American snacks is not liable for VAT on its product Mega Marshmallows, used for making s’mores, because the marshmallows are not considered confectionery, a U.K. tribunal has held.

In its September 21 decision in Innovative Bites Ltd. v. HM Revenue & Customs, the First-Tier Tribunal (Tax Chamber) (FTT) allowed Innovative Bites Ltd.’s appeal and found that Mega Marshmallows should be zero-rated for VAT purposes under schedule 8 of the Value Added Tax Act 1994. Under U.K. law, supplies of food for human consumption are generally zero-rated for VAT purposes. Schedule 8 provides that confectionery is excluded from being zero-rated, which means that chocolates, sweets, and biscuits are standard-rated. However, the decision notes that U.K. law does not provide a specific definition of confectionery.

Innovative Bites, a U.K.-based wholesaler of American snacks, including Twinkies, sells oversize marshmallows to British retailers, including Asda, Morrisons, Iceland, and the Range. The packaging of Mega Marshmallows suggests that they are intended for roasting over an open flame, rather than for consumption as a snack. The packaging includes instructions for how to properly roast the marshmallow and a description of how to make a s’more.

HMRC claimed that the oversize marshmallows should be standard-rated as confectionery, and in August 2019 it issued VAT assessments to Innovative Bites totaling approximately £470,000 for the period between June 2015 and June 2019. HMRC argued that the marshmallows may be eaten as a snack on the go, and that they can be found on the company’s website under the category “sweets, candy, and chocolate.” However, Innovative Bites argued that the marshmallows were intended to be used as an ingredient in s’mores, as evidenced by the marketing and packaging of the product. It explained that products that are subject to additional cooking processes do not fall within the scope of confectionery.

The FTT said that in making its characterization it must consider the nature of the product, the placement of the product in grocery stores, and the packaging and marketing of the product. It said it found that most consumers purchasing the oversize marshmallows use them for roasting to make s’mores, and that it must weigh that with the other factors. The FTT noted that the slight changes in the text of the marshmallows’ packaging over time were not significant in its characterization.

The FTT sided with the company and said that the oversize marshmallows should not be standard-rated as confectionery. It said the product is sold and purchased specifically for roasting over an open flame, as evidenced by its marketing and packaging, the size of the marshmallows, and the product's placement in grocery store aisles in the barbecue section during the summer. The decision notes that in determining whether the marshmallows are confectionery, the FTT analyzed it from the viewpoint of a typical consumer and gave confectionery its ordinary meaning.

The appellant in Innovative Bites Ltd. v. HMRC, [2022] UKFTT 352 (TC), was represented by Tim Brown, instructed by the VAT Consultancy. HMRC was represented by David Wilson.