Innovative Bites Ltd v Revenue & Customs (VALUE ADDED TAX - zero rating - food )

Factual and Procedural Background

This appeal concerns the VAT treatment of a food product called "Mega Marshmallows" ("the Product"), which are oversized marshmallows intended to be roasted before consumption or used as an ingredient in a traditional campfire treat known as a s'more. The appellant, a wholesaler of American sweets and treats, challenged HM Revenue and Customs' (HMRC) decision that the Product was standard rated as confectionery rather than zero-rated as food. HMRC issued assessments totaling £472,928 covering supplies from June 2015 to June 2019. The appellant argued that the Product is not confectionery because it is intended to be roasted prior to consumption. The matter was heard remotely before Tribunal Judge Jonathan Cannan and Mr Michael Bell, with representation from counsel for both parties.

Legal Issues Presented

1. Whether the Product falls within the definition of "confectionery" for the purposes of Excepted Item No 2, Group 1 Schedule 8 of the Value Added Tax Act 1994 (VATA 1994).
2. Whether the Product should be standard rated as confectionery or zero rated as food.
3. How to apply the ordinary meaning of "confectionery" considering the Product's intended use, marketing, packaging, and consumer perception.

Arguments of the Parties

Appellant's Arguments

• The Product is intended to be roasted over an open flame before consumption or use as an ingredient in making s'mores, and is not normally eaten as a snack without roasting.
• Items intended to undergo a cooking process before eating should not be classified as confectionery.
• The Product is marketed primarily for roasting, reflected in packaging, placement in supermarket aisles (world foods and barbecue sections), and seasonal sales patterns.
• The size and packaging of the Product indicate it is designed for roasting rather than casual snacking.
• Consumers purchasing marshmallows as sweet snacks typically choose regular marshmallows, not the Product.
• The depiction of a cartoon chef with the phrase "Baking Buddy" suggests the Product is an ingredient rather than confectionery.

Respondents' Arguments (HMRC)

• The Product shares fundamental characteristics of confectionery: it is sweet and produced by mixing ingredients.
• The Product can be eaten as a snack directly from the bag, as with regular marshmallows.
• Packaging identifies the Product as suitable for snacking, and it is eaten with the fingers, either roasted or unroasted.
• The Product may be eaten "on the go," consistent with confectionery consumption.
• There is a trend toward outsized sweets, and the Product fits within this category.
• Regular marshmallows, which are confectionery, can also be roasted and enjoyed similarly.
• The Product appears on the appellant’s website under "sweets, candy and chocolate."
• Dual use products like chocolate bars can be confectionery despite possible culinary uses; categorisation depends on product-specific evidence.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by acknowledging that the Product shares fundamental characteristics of confectionery: it is sweet and produced by mixing ingredients. It accepted that regular marshmallows are confectionery and standard rated. However, the court emphasized that confectionery is generally not intended to be cooked or roasted before consumption.

The court considered factors supporting both characterisations. On HMRC’s side, the Product can be eaten as a snack without roasting, packaging indicates snacking, and it is eaten with fingers. On the appellant’s side, the Product is marketed primarily for roasting, placed in different supermarket aisles (world foods and barbecue rather than confectionery), and its size makes it suitable for roasting. Seasonal sales patterns further supported the appellant’s position.

The court gave particular weight to the nature of the Product, its packaging and marketing, its placement in retail environments, and the finding that most consumers purchase it for roasting. It discounted the relevance of the website categorisation and the suggestion that the Product is intended for "on the go" snacking.

Applying the ordinary meaning of "confectionery" from the perspective of the typical consumer, the court concluded that the Product is not confectionery because it is intended to be subjected to a cooking process before consumption and is marketed accordingly. The court noted that the Product's use as an ingredient in making s'mores, while relevant, lacked sufficient evidence to be determinative.

Holding and Implications

The tribunal allowed the appeal, holding that the Product does not fall within the term "confectionery" for the purposes of Excepted Item No 2, Group 1 Schedule 8 of the VATA 1994. Consequently, the Product is zero-rated for VAT.

The direct effect of this decision is that the appellant is not liable for the assessments issued by HMRC for the Product during the relevant periods. The decision clarifies the application of VAT zero-rating to food products intended for cooking prior to consumption but does not establish new binding precedent beyond the specific facts considered.