The soft side of VAT: Mega Marshmallows

HMRC and food manufacturers have a long history of disputes over the VAT treatment of food products. One of the best-known examples involved McVitie's, which famously baked a giant Jaffa Cake to help demonstrate that a Jaffa Cake is a cake rather than a biscuit. The distinction mattered because cakes are generally zero-rated for VAT, whereas chocolate-covered biscuits are normally standard-rated. An important factor in that case was how the product behaved when stale: cakes become hard, while biscuits become soft. It remains a favourite VAT fact and still appears in trivia quizzes today.

The latest chapter in the story of VAT and food products concerns a dispute involving oversized marshmallows and demonstrates just how nuanced VAT classification can be.

Most food products are zero-rated for VAT, but there are several exceptions and, in some cases, exceptions to those exceptions.  One of the exceptions to the zero rating of food is confectionery.

The VAT legislation says that “'Confectionery' includes chocolates, sweets and biscuits; drained, glacé or crystallised fruits; and any item of sweetened prepared food which is normally eaten with the fingers."

Innovative Bites Limited v The Commissioners for HMRC [2026] UKFTT 500 (TC) centered on the VAT treatment of Mega Marshmallows. HMRC argued that the product should be classified as confectionery and therefore subject to VAT at the standard rate. Innovative Bites maintained that the product was food and should remain zero-rated.

There was no dispute that Mega Marshmallows are a sweetened prepared food. Ultimately, the central question was whether they are "normally eaten with the fingers".

The dispute has now been running for several years and has passed through multiple levels of the UK court system. HMRC issued VAT assessments of more than £470,000 covering supplies made between 2015 and 2019.

In 2022, the First-tier Tribunal found in favour of Innovative Bites after considering factors such as the product's size, marketing, packaging, supermarket placement and how consumers typically used it. The Tribunal concluded that Mega Marshmallows were not confectionery in the ordinary sense of the term.

HMRC appealed, but in 2024 the Upper Tribunal upheld the original decision. The matter then proceeded to the Court of Appeal. Although the Court did not decide that the products were standard-rated, it held that the earlier tribunals had not properly answered a specific statutory question: whether Mega Marshmallows were a sweetened prepared food that is "normally eaten with the fingers". The case was therefore sent back to a differently constituted First-tier Tribunal.

The new Tribunal considered evidence of the main ways consumers used the product. This included eating marshmallows roasted on skewers, using them as part of a s'more, and eating them directly from the packet. Looking at the evidence as a whole, the Tribunal concluded that Mega Marshmallows were consumed more often by non-finger methods than by finger methods. As a result, they were not "normally eaten with the fingers" and therefore fell outside the statutory definition of confectionery for these purposes. HMRC's assessments were overturned once again.

The case illustrates how surprisingly fine VAT distinctions can be and how strongly VAT outcomes can depend on evidence of how consumers actually use a product.

In a retail situation, any VAT charge becomes a direct cost to the consumer or, if applied incorrectly, to the business itself. A 20% VAT difference can have a significant impact on pricing, competitiveness, and profit margins. Additionally, the VAT legislation in relation to food is complex and, there is an extensive body of case law in this area which means that a detailed review is often required to achieve the greatest possible degree of certainty regarding a product's VAT treatment.

This is particularly important because obtaining a definitive view from HMRC on the VAT liability of a new food product can be difficult. In practice, disagreements often only come to light during a VAT compliance check or enquiry. By that stage, the financial exposure can be significant.

VAT should therefore be considered as part of the product development process rather than after a product has already been launched. Obtaining specialist advice early can help businesses understand the likely VAT treatment of a product, evaluate potential risks and ensure that pricing decisions are made with confidence. It can also help shape packaging, marketing and product positioning in situations where consumer use may influence the VAT outcome. As the Mega Marshmallows case demonstrates, even seemingly minor details about how a product is marketed and consumed can ultimately determine whether VAT applies.

For further guidance on the above, please get in touch with your usual Crowe contact.