The battle between HMRC and Innovative Bites Ltd began in 2022 when the tax authority demanded that the confectionery company pay £472,928 in VAT on their popular product 'Mega Marshmallows' ...
Marshmallows are still an ingredient, not confectionery, despite what HMRC thinks!
However, the company argued that their marshmallows should not be classified as confectionery and therefore should not be subject to VAT. The case was taken to the First Tier Tribunal (FTT) where the judge ruled in favour of Innovative Bites Ltd, stating that the marshmallows were sold and purchased as a product specifically for roasting, and therefore should not be subject to VAT.
"HMRC then appealed this decision!"
They argued that the FTT had erred in not giving enough weight to the means of eating the marshmallows. They claimed that the product was meant to be eaten with fingers, which falls under the definition of confectionery and is subject to VAT at 20%.
However, the Upper Tier Tribunal rejected this argument and upheld the FTT's decision, stating that the means of eating the marshmallows should not be a determining factor in their classification.
The judges also noted that roasting the marshmallows gives them a different texture and flavour, making them a different product altogether. This physical change in the product was a key factor in the court's decision to classify the marshmallows as an ingredient rather than confectionery.
The court also considered that more Mega Marshmallows were consumed during the warmer months, when they are more likely to be roasted, further supporting their classification as an ingredient.
"This ruling has significant implications for both businesses and consumers!"
For businesses, it means that they can now sell marshmallows without charging VAT, potentially increasing their profit margins. On the other hand, consumers may see a decrease in the price of marshmallows as businesses no longer have to pass on the VAT cost to them. This decision also highlights the complexities of UK tax laws and the importance of understanding the nuances of different products and their classifications.
The case also raises questions about the definition of confectionery and the criteria for determining whether a product falls under this category. In this case, the court considered the physical change in the product when roasted, as well as the intention of the consumer when purchasing the marshmallows, to determine their classification. This highlights the need for clear and consistent guidelines from HMRC to help businesses understand their tax obligations.
Despite this loss, HMRC has stated that it will continue to challenge any attempts to avoid paying VAT on confectionery products. However, this ruling sets a precedent for future cases and may lead to more businesses challenging HMRC's classification of their products!
The court's decision to classify 'Mega Marshmallows' as an ingredient rather than confectionery has significant implications for both businesses and consumers. It highlights the complexities of UK tax laws and the importance of understanding the nuances of different products.
This ruling also raises questions about the definition of confectionery and the criteria for determining its classification. As the UK tax system continues to evolve, businesses must stay informed and seek professional guidance.
You must ensure compliance and avoid any legal battles with HMRC.
Until next time ...
ROGER EDDOWES Business Godparent
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about marshmallows or you're wondering about paying VAT on your products (confectionery or not!), it may be a great idea to call me on 01908 774320 and let's see how I can help you.
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Roger trained at Edward Thomas Peirson & Sons in Market Harborough before working at Hartwell & Co, followed by Chancery, as a partner. He started Essendon Accounts and Tax with Helen Beaumont in 2014 as a general practitioner with a hands-on approach.
Roger loves getting his hands dirty, working with emerging, small-to-medium and family businesses to ensure they receive the best possible accountancy advice. Roger utilises an extensive network of business contacts to leverage the best guidance and practical solutions.
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