Mega Marshmallows Zero-rated for VAT, FTT Rules

The First-tier Tribunal (FTT) has ruled that 'Mega Marshmallows' are not confectionery and are therefore zero-rated for VAT, in a case that reached the Court of Appeal.

A wholesaler of American sweets and treats which supplied Mega Marshmallows was issued with VAT assessments totalling £472,928 in respect of supplies made over about four years, after HM Revenue and Customs (HMRC) decided that they were confectionery and therefore standard-rated. Confectionery is listed as an exception to the zero rating provisions for food in Schedule 8, Group 1 of the Value Added Tax Act 1994. The wholesaler appealed to the FTT, arguing that Mega Marshmallows did not fall within the definition of confectionery as they were intended to be roasted over a campfire or barbecue before being eaten or used as an ingredient in preparing a s'more.

The FTT allowed the appeal. While Mega Marshmallows bore the fundamental characteristics of confectionery, they were sold as a product specifically for roasting and their size made them particularly suitable for roasting. They were found in the barbecue sections of supermarkets during the summer months, when more of them were sold, or in the world foods section. Although they would be eaten with the fingers if not roasted, the FTT did not give particular weight to the means of eating. That decision was subsequently upheld by the Upper Tribunal (UT), which found that although the FTT had erred in its approach to construing Note 5 to Group 1, whether Mega Marshmallows fell within Note 5 as 'sweetened prepared food normally eaten with the fingers' was not material given the FTT's other findings of fact.

HMRC appealed to the Court of Appeal on the grounds that the UT had erred in its interpretation of Note 5 and in concluding that the FTT's admittedly erroneous approach to Note 5 was not a material error of law. Allowing the appeal, the Court found that a product that falls within Note 5 is confectionery unless it would be absurd to classify it as such, and the UT had been mistaken in thinking that other factors might lead to a conclusion that the product is not confectionery. The question of whether Mega Marshmallows were sweetened prepared food normally eaten with the fingers, within the meaning of Note 5, was remitted to the FTT.

The FTT agreed that 'normally' in the context of Note 5 meant 'more often than not', or over 50 per cent of the time. It found that two of the four ways of eating Mega Marshmallows – roasting them on a skewer and either eating them from the skewer or eating them as part of a s'more – did not constitute eating with the fingers. They were more frequently eaten directly from the skewer than removed from the skewer and eaten with the fingers, and they were also more frequently roasted and eaten as part of a s'more than eaten unroasted from the packet. In aggregate, therefore, they were more often eaten in a way that did not involve eating with the fingers, and so they did not fall within Note 5.