Do you ever think about VAT while you are buying or eating marshmallows? I realise I am probably in the minority on this one, but marshmallows have become the subject of the latest foodie VAT case and has made it from the First-Tier tribunal all the way to the Court of Appeal and back again to ascertain their correct VAT treatment.
What does the legislation say?
VAT legislation has the following to say:
- Food is zero-rated
- There is an exception for confectionery, and a note that confectionery includes ‘…any item of sweetened prepared food which is normally eaten with the fingers’
This means that food is zero-rated (no VAT added to the retail price) but confectionery is standard-rated (VAT must be added to their retail price and then handed over to HMRC).
How does this apply to marshmallows?
You will be familiar with the two main sizes of marshmallows – mini and standard – but may be surprised to learn that these actually have different rates of VAT.
Mini marshmallows are considered to be food, but not confectionery. They are mainly used as ingredients in other foods, used in baking or added to hot-chocolate drinks for example. They wouldn’t normally be eaten with fingers straight from the bag. Mini-marshmallows are therefore zero-rated.
Standard marshmallows are considered to be confectionery. They are not an ingredient but a stand-alone item that isn’t added to anything else, and it is normal to eat them with the fingers. Standard marshmallows are therefore standard-rated.
What’s the controversy?
Enter a company called Innovative Bites, who sell a product called Mega Marshmallows. Mega Marshmallows were intended to be roasted over a fire, or used in s’mores, and the packaging included roasting instructions.
The company treated sales of this product as zero-rated food, and HMRC disagreed saying that they were standard-rated confectionery.
The First Tier Tribunal (FTT) agreed with the company, that the mega marshmallows were not confectionery because they required further preparation (roasting), were used as an ingredient (in s’mores), and also due to their larger size, the packaging information, and their positioning for sale in the barbecue section of supermarkets.
The Upper Tribunal (UT) agreed with the FTT that the mega marshmallows are food but not confectionery.
HMRC took the case to the court of appeal. The court found that if a product is a sweetened prepared food usually eaten with the fingers then it is confectionery and should be standard rated. The court also decided that the FTT and the UT had not considered this question and has sent the case back to the FTT to be reconsidered.
What does this mean?
We continue to have two different VAT rates for mini and standard marshmallows, but the eventual treatment for bigger-than-standard marshmallows remains uncertain.
Obviously there are more points of law involved in this case than I have set out in this blog. However, it still potentially raises some interesting questions. I have eaten a giant marshmallow, intended to be toasted over a fire pit, with my fingers straight from the bag, but would someone normally do this? Does using a stick to toast the marshmallow before eating it count as eating it with the fingers? How big or small does a marshmallow have to be before it stops being normal to eat it with the fingers?
Does size matter? It would appear that for marshmallows it certainly does!
Do VAT and tax legislation rules confuse you? I can help you make sense of it all! Get in touch with Greenwood Tax and Accounting today.
