In my Blog, “Marshmallow VAT Liability: I want some more!”, posted on 22nd October 2022, I told you about a brilliantly bonkers tax tribunal case, in which HMRC lost. You might think this to be the end of the story, but no, as you haven’t factored in the tax office’s seemingly masochistic fondness for self-inflicted humiliation. So, read on………
Fast forward two years and just when you might think that the VAT liability of giant mega marshmallows had been settled; HMRC, who clearly hadn’t learnt anything from their bruising defeat the first-time round, decided that they believed in déjà vu and went into court for a second time.
Marshmallow VAT Liability Round 2: The background to the case
The original court case concerned Innovative Bites Limited (IBL) selling giant marshmallows and their argument for zero rating them. Their basic case being that they were designed and marketed for roasting over a campfire, or for use in making s’mores, and were packaged and marketed for roasting,
They were not considered confectionery as they were intended for roasting (or toasting). in other words, they needed further preparation or cooking, rather than being intended for immediate consumption. Also, IBL referred to sales numbers, which showed that by far the majority of mega marshmallows sales were in the warmer months, whilst other mallow products sales were similar over the entire year.
This supports the argument that customers would look at them as a product for roasting (on an outdoor fire or barbeque) rather than purchasing them merely for snacking. The other critical point was that this product is invariably placed on sale in the barbecue aisle of a supermarket.
In 2022 the First-tier tribunal (FTT) accepted the taxpayer’s reasoning and concluded that this product – in light of the above reasons, should be zero rated for VAT purposes. HMRC, with their penchant for self-inflicted pain, appealed the decision to the Upper-tier tribunal (UTT).
Marshmallow VAT Liability Round 2: HMRC left sucking a lemon
In their statement of appeal HMRC stated that “any item that falls within a description in note 5 of the 1994 VAT Act, is automatically confectionery, without caveat or override”. This was a rather audacious statement considering the fact that there are many other items on the market that would normally be classified as confectionery from the outset, such as cooking chocolate and mini marshmallows, but which are then exempted because of their use.
The UTT pointed out that HMRC had completely undermined their own position, by the fact that other products that are prima facie confectionery – such as for baking or for cooking – are assessed from a VAT perspective by them as zero-rated. The UTT concluded by reminding HMRC that VAT law, is often in direct conflict with HMRC’s own manual and they therefore cannot possibly make a satisfactory argument that every confectionery-esque item is automatically a standard-rated product
Accordingly, the Upper-tier tribunal dismissed HMRC’s appeal, with the UTT Chair also commenting that she would not be minded to allow a further appeal to the Appeals Court.
Marshmallow VAT Liability Round 2: Looks can be deceptive
As the UTT pointed out in its decision, HMRC’s approach to deciding the VAT liability of a product, would be inconsistent with the fact that other products that are prima facie confectionery, have been assessed by them for VAT as being zero-rated.
It is also clear that Note 5 cannot be used to extend the intended meaning of VAT law, or to put it another way, if something isn’t confectionery, it can’t be deemed to be confectionery just because of note 5.
it is important to recognise that products change and evolve. New products are being created every day, and therefore the law should consider that a product that may look to be one thing from a distance may not be what it seems. (One wonders what the VAT liability of Mars bars would be if they were marketed as suitable for deep frying).
This decision could provide a blueprint going forward on how we should approach confectionery (and food items in general). This also raises an interesting question of whether the UTT has opened Pandora’s box to the fact that historically there are a lot of cases whose VAT liability were decided incorrectly.
It is therefore important that anyone that sells any product on the borderline of confectionary items, ensures that they get some VAT advice, as potentially small changes to the size, packaging and/or the marketing could have a huge impact on the VAT position.
Tax Accountant’s view
I don’t think I need to add any further comment to that of the Upper-tier tribunal, but I am disappointed that once again, HMRC has wasted tens of thousands of pounds of taxpayers’ money on pursuing a case, that they would not have taken up if only they’d read their own guidance manual!
