A Sticky Problem... When Marshmallows and VAT Collide

HM Revenue and Customs (‘HMRC’) appeal Innovative Bites v HMRC [2022] UKFTT 00352 (TC) (‘Innovative Bites’) to the Upper Tribunal.

In this article we revisit the First-tier Tribunal’s decision in Innovative Bites and ask… when does a large marshmallow become a cooking ingredient rather than a snack, why should it matter, and what can we learn from this? Matthew Fleming, Bernadette Virk and Luke Fisher delve deep into this pillowy sugar-scented conundrum. ?

It’s all in the name

Innovative Bites Limited (the ‘Appellant’) was told by HMRC that it owed VAT on its oversized marshmallows, which added up to a tax bill of ￡473,000. The Appellant, a Loughborough-based food-importing company, disagreed and submitted to the First-tier Tribunal (‘FTT’) that these large marshmallows were not, in fact, snacks (subject to VAT), but were rather ingredients used for cooking (subject to zero-rating).

The Appellant argued that the oversized marshmallows were clearly intended, as per instructions on the packaging, to be roasted as a cooking ingredient for S’Mores. (S‘Mores, for those not in the know, are an American treat whereby a large roasted marshmallow is sandwiched between chocolate digestive biscuits). HMRC disagreed, pointing out that the oversized marshmallows could still be eaten ‘on the go’ like confectionery.

Considering the pillowy problem, the FTT ruled in favour of the Appellant. It pointed to several factors including the marketing, usage and positioning of the oversized marshmallows when held out for sale in its decision-making on the case.

HMRC have recently appealed, so all eyes will be on the Upper Tribunal (‘UT’) to get to grips with this oversized marshmallow debate. However, which points of law will the UT have to contend with and how will the FTT’s decision stack up?

The big VAT questions

Innovative Bites focused on the definition of ‘food’ for the purposes of Group 1, Sch. 8 of the Value Added Tax Act 1994, and the Courts and Tribunals have taken various approaches to determining what is or isn’t zero-rated food over the years.

An important decision in this context is the Court of Appeal’s (‘CA’) decision in Commissioners of Customs and Excise v Ferrero UK Ltd [1997] STC 881 (‘Ferrero’). In Ferrero, it was decided that a key test to help determine whether the product should be a biscuit was “what view would be taken by the ordinary man in the street who has been informed as we have been informed.”?

A decade later, in the case of the Commissioners for Her Majesty’s Revenue & Customs v Procter & Gamble UK [2009] EWCA Civ 407, the CA agreed with Ferrero and went on to set out that a ‘multifactorial’ assessment was required when determining the VAT liability of a product. The CA confirmed a multifactorial assessment should be used when assessing the category that a product should be placed into for VAT purposes.

In the years that followed, the Courts and Tribunals continued to use this multifactorial assessment approach to determine the categories that relevant products should belong to. This brings us to the FTT’s most recent approach in categorising the oversized marshmallows in Innovative Bites.

To roast, or not to roast, and wherefore art thou placed?

The critical question in Innovative Bites was whether the melting mallows should be categorised as standard rated confectionery or a zero-rated cooking ingredient. HMRC’s submissions noted that the large marshmallows were confectionery as they could be eaten using fingers as a snack from the packaging, and that they were held out for sale on the confectionery section of the Appellant’s website.

The Appellant bit back, arguing that as well as the packaging displaying cooking instructions which confirmed that the marshmallows should be roasted, they were also held out for sale in the world foods and barbeque aisles of supermarkets, rather than in the confectionery aisles. This positioning of the marshmallows in the retail stores proved to be very persuasive for the FTT when finding in favour of the Appellant. For comparison, the contested chocolate bar in the referenced case Kinnerton Confectionery Ltd v HM Revenue & Customs [2018] UKFTT 0382 (TC) (‘Kinnerton’) was found to be confectionary not cooking chocolate and was held out for sale in supermarkets alongside confectionery items. This was a decisive point in Kinnerton which helped persuade the FTT that the chocolate bar was confectionery. Both decisions highlight the potential weight that the FTT places on the location of where a product is held out for sale.

HMRC attempted to chomp back and submitted in relation to Kinnerton that dual-purpose products, which have both the potential to be confectionery and ingredients for cooking, would fall within the standard rated VAT category. HMRC’s submission related to the finding in Kinnerton that a dual-purpose chocolate bar was found to be confectionery, however, upon closer inspection there are several factors which point towards HMRC’s argument in Kinnerton being flawed. For example, the UT confirmed during its multifactorial assessment that the chocolate bar’s wrapper contained no explicit statement that the chocolate bar was ‘cooking chocolate’ or ‘for cooking’, nor did the wrapper contain any cooking recipes. Quite the opposite to the large marshmallow’s fact pattern in which, for example the packaging contained cooking instructions for a customer to assemble their own S’Mores.

The Appellant managed to land a decisive blow when the FTT disregarded HMRC’s submission that the path from the Appellant’s website homepage to the oversized marshmallow ending at 'sweets, candy and chocolate' alluded to it being confectionary. The FTT confirmed that it did not consider this to be reliable evidence that the marshmallow was marketed as confectionary. This was because of the function of algorithms used by the Appellant’s website which suggests products to consumers such as confectionary, that are frequently bought alongside the oversized marshmallow.

This is an interesting view from the FTT and whether the UT will agree remains to be seen, however, due to the increasing number of products that are sold online, the FTT’s approach in Innovative Bites seems like a logical one.

The impact of marketing

Lastly, marketing was a decisive aspect of the marshmallow case with the FTT relying on UT’s decision in HM Revenue & Customs v The Core (Swindon) Ltd [2020] UKUT 301 (TCC) (‘The Core’). The Core confirms that a product must not only be marketed for a particular purpose but that the consumer must also utilise it for that marketed purpose. The FTT found that the marketing of the large marshmallows, which outlined how to assemble S’Mores, correlated with its actual usage by consumers.

This can be seen as a two-part test with both parts having to be met. For example, a chocolate bar could be marketed as ‘cooking chocolate’ but if consumers treat the chocolate as normal confectionery in practice then it is possible that the marketing of the chocolate would be immaterial. This has important implications for other food related products that might be aiming to become zero-rated. For example, cooking chocolate must not only be marketed for cooking but consumers must also actually use the cooking chocolate for cooking.?This could perhaps be a nod back to the ‘ordinary man in the street’ test in Ferrero.

Overall, the FTT’s process for determining the VAT treatment of the larger-than-life marshmallows infers that every product is still assessed on its own merits. Assessing each product on its own individual facts is an important aspect of the multifactorial assessment. Whether or not the UT will agree with the FTT’s views, however, remains to be seen.??

Key takeaways

The Appellant was able to persuade the FTT on a number of its points during the multifactorial assessment which led to the FTT ruling that the oversized marshmallows were indeed a cooking ingredient, and a summary of the key points in the decision are as follows:

• The marshmallows were held out for sale as a cooking ingredient;
• The packaging and marketing adequately outlined the marshmallows as a cooking ingredient;
• It was irrelevant that the Appellant’s website took the customer to the confectionary section; and
• The Appellant’s intended purpose of the marshmallow’s correlated with consumers’ perception and actual usage as a cooking ingredient.

The most important factor in Innovative Bites appears to be ensuring that the product was marketed correctly in store and online and that consumers actually used the product for the marketed purpose. It also seems that the consumers’ actions, which cannot be controlled, were perhaps the most decisive factor in Innovative Bites.

For a copy of the FTT decision please click here - TC 08605.pdf (tribunals.gov.uk).

KPMG Law’s Tax Disputes and Investigations team are experts in VAT disputes involving HMRC. We specialise in the settlement of disputes by way of alternative dispute resolution and litigation. Please reach out to Matthew Fleming ([email protected]), Bernadette Virk ([email protected]) or Luke Fisher ([email protected]) in KPMG Law’s Tax Disputes and Investigations team should you have any enquiries.

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