HMRC can’t yet have its VAT cake and eat it
Marshmallow Dispute Returned to U.K. Lower Court further review
The long-running VAT dispute over Mega Marshmallows is heading back to the First-Tier Tribunal (Tax Chamber) (FTT) after the U.K. Court of Appeal ruled on March 21, 2025, that further review is required to determine whether the product is “sweetened prepared food which is normally eaten with the fingers.” This classification under note 5 to schedule 8 of the Value Added Tax Act 1994 (VATA 1994) could result in the marshmallows being subject to standard VAT rates as confectionery. The Court of Appeal ruled that the manufacturer failed to prove that the marshmallows aren’t “normally eaten with the fingers”. If they can, then they are classified as sweets, subject to 20% VAT.
The case now returns to the FTT, which will determine whether Mega Marshmallows are normally eaten with the fingers. If they are, they will be standard-rated for VAT; if not, they may retain their zero-rated status.
Are Mega Marshmallows ‘Confectionery’ for VAT purposes?
Under U.K. VAT law, food products for human consumption are typically zero-rated, but confectionery is excluded. Note 5 defines confectionery as including “chocolates, sweets and biscuits; drained, glacé or crystallized fruits; and any item of sweetened prepared food which is normally eaten with the fingers.” If the FTT finds that Mega Marshmallows meet this description, they will be subject to the standard 20% VAT rate.
However, the court acknowledged that exceptions exist—products classified under note 5 are deemed confectionery unless such a classification would be “absurd” or clearly not intended based on their purpose. This leaves the FTT with the critical task of determining whether the oversized marshmallows fit within the definition.
£470,000 VAT Dispute
Innovative Bites Ltd., a U.K.-based wholesaler of American snacks, including Twinkies, has been fighting VAT assessments issued by HMRC totaling approximately £470,000 for the period between June 2015 and June 2019.
HMRC argued that Mega Marshmallows should be standard-rated as confectionery because they can be eaten straight from the bag, appear under the “sweets, candy, and chocolate” category on the company’s website, and are often used as a treat.
Innovative Bites countered that their oversized marshmallows are primarily marketed and sold for roasting—a key ingredient for making s’mores. They emphasised that products requiring additional preparation should not be classified as confectionery, highlighting that Mega Marshmallows are often displayed in grocery store barbecue aisles rather than the sweets section.
From FTT to the Court of Appeal
In September 2022, the FTT ruled in favor of Innovative Bites, concluding that Mega Marshmallows were not confectionery. The tribunal focused on the product’s size, marketing, and intended use, though it did not consider the method of consumption in its analysis.
HMRC appealed, but the Upper Tribunal (Tax and Chancery Chamber) upheld the FTT’s decision in April 2024. HMRC then took the case to the Court of Appeal, arguing that the Upper Tribunal misinterpreted note 5 by treating it as a rebuttable presumption rather than a definitive rule.
The Court of Appeal agreed with HMRC, ruling that note 5 should be interpreted as conclusive—meaning that if a product falls within its scope, it must be classified as confectionery unless doing so would be unreasonable. The court emphasized that schedule 8 must be interpreted in line with its accompanying notes, per section 96(9) of the VAT Act.
