HMRC loses £470k giant marshmallows VAT case

What UK VAT Case Law Tells Us About Food Classification

UK VAT legislation is often presented as a rules-based system. In practice, however, some areas rely heavily on interpretation, particularly when it comes to food.

Over the years, a number of seemingly straightforward products have ended up before the courts, with significant amounts of tax at stake. The outcomes highlight an important point for businesses: small product differences can lead to very different VAT treatments.

The legislative starting point

Under UK VAT rules, most food is zero-rated (0%). However, there are key exceptions which are standard rates and subject to 20% VAT including Confectionery and Chocolate-covered biscuits.

The difficulty lies in how these categories are interpreted. The legislation provides definitions, but in many cases, the boundaries are not clear-cut. This is where case law becomes critical.

Marshmallows: when size and use matters

HMRC spent years arguing the case that Giant Marshmallows should be rated as 'confectionery' and subject to 20% VAT.

Standard-rated confectionery includes chocolates, sweets and candies, chocolate biscuits and any other 'items of sweetened prepared food which is normally eaten with the fingers.' It also includes items that are inherently sweet, for example, certain fruit and cereal bar products.

Innovative Bites Limited produced a product called 'Mega Marshmallows', which were larger than regular sized marshmallows and sold in packaging which promoted them as a product which should be roasted before being eaten.

After four tax hearings, dating back to 2022, judges recently sided with the makers of giant marshmallows in this case, confirming that the food company did not have to pay VAT on its marshmallows stating that the sugary items should be zero rated as the 'oversized marshmallows are not normally eaten with the fingers'.

Jaffa Cakes – when is a cake not a cake?

One of the most well-known VAT cases took place in 1991, where McVitie's successfully argued that Jaffa Cakes are cakes because they have a sponge base, a soft texture, and harden when stale, unlike biscuits which go soft when stale.

This landmark case resulted in HMRC classifying Jaffa Cakes as cakes rather than biscuits, making them zero-rated instead of standard-rated.

Chocolate-covered teacakes: more than just a biscuit base

A similar issue arose in litigation involving chocolate-covered teacakes.

Although they include elements that could suggest a biscuit (such as the base), the courts found that the product as a whole is more akin to a cake. As a result, they were treated as zero-rated.

Final thoughts

The UK VAT system for food is often described as complex, but the reality is more nuanced. It is a system shaped not only by legislation, but by decades of case law interpreting how that legislation applies in practice.

As the examples above demonstrate, seemingly minor product differences can determine whether VAT is charged at 0% or 20%.

For businesses operating in this space, understanding those distinctions, and seeking advice where needed, is essential.

Author

Zyaad Peertum
Associate Director – VAT & Bookkeeping