Food has made yet another appearance in the VAT courts. This time its Mega-Marshmallows and whether they should be standard rated confectionary or zero-rated essential food.
HMRC vs Innovative Bites
HMRC brought the case against Innovative Bites arguing that marshmallows, although food, were confectionary and included in excepted item 2 to the VATA1994, Schedule 8, Group 1. They argued that VAT should have been charged at the standard rate, therefore, were owed £473k.
Innovative Bites countered that their Marshmallows were held out for sale as a raw food item that warranted further processing to be enjoyed. Namely, being roasted over a campfire. And to back this up, they referred to the fact that the marshmallows were found in the barbeque aisle of the supermarket and had specific instructions on how to correctly roast them printed on the packaging.
First Tier Tribunal agreed
The Mega-Marshmallows were designed to be further processed, therefore, should not be treated as confectionary. Much in the same way that small marshmallows are also zero rated as a raw cooking ingredient used in baking.
But HMRC wasn’t satisfied. Bringing the case to the Upper Tier Tribunal (UTT), they argued that the marshmallows didn’t need to be cooked to be enjoyed. The size of the product and the way in which it is marketed, shouldn’t make a difference to the reality of what the product is used for was HMRC’s view. A person could simply open the bag and enjoy the marshmallows in their “raw” state.
The UTT disagreed with HMRC. Although the marshmallows could be enjoyed without further processing, the fact that they were “Mega” Marshmallows, meant they would be purchased for roasting. If a member of the public wanted to eat marshmallows, they would buy the medium sized ones.
Should you risk it?
We’ve had a series of food product related cases this last year from Turmeric drinks to Poppadum’s Sensations. For food manufacturers and retailers the application of VAT on products is both a potential risk as well as a financial opportunity.
Risk – if you believe your product should be Zero Rated (so do not account for VAT on the sales) only to find HMRC disagree with that view and demand the VAT underpaid.
Opportunity – if you have been accounting for VAT on a product but then win the argument that it should have been Zero rated.
In a price conscious market securing Zero rating enables price reductions as the VAT is no longer due or equally, an enhanced profit margin if you leave to pricing at the former VAT inclusive level.
As this Marshmallow case shows, VAT liabilities in the area of food are complex and influenced by issues including ingredients as well as how the product is marketed and held out for sale. It’s not just a case of whether it’s chocolate covered!
Could we see more of these types of arguments coming forward in future? Undoubtedly – for instance, a small bottle of wine marketed as an ingredient for cooking, could it be a “raw” cooking ingredient?
What’s important to remember is VAT can directly affect the profit and financial viability of any organisation.
When VAT gets complicated contact Xeinadin’s Indirect Tax team using the contact form below.
This article is for information only and specific advice should always be sought.
