Case Report: Giant Marshmallows are not Confectionary

It was held that out of the ways in which giant marshmallows can be eaten, it was clear (for the reasons discussed below) that those which did not involve the fingers were the more frequently used. As such, giant marshmallows are not “sweetened prepared food which is normally eaten with the fingers” and are therefore zero-rated as “food of a kind used for human consumption” by virtue of Item 1, Grp. 1, Sch. 8, VATA 1994.

Context

• This case relates to the VAT treatment of “giant marshmallows” and has been going through the courts for some time.
• The appellant is a wholesaler of giant marshmallows to UK retailers.
• HMRC decided that the giant marshmallows were confectionery and ought to have been standard-rated and issued VAT assessments accordingly to the tune of c.£475k.

Legislation

• The basic VAT position is that supplies of food of a kind used for human consumption are zero-rated.
• However, zero-rating does not apply to “excepted items” and Excepted Item 2, Grp. 1, Sch. 8, VATA 1994 (“Excepted Item 2”) clarifies that:
  “Confectionery, not including cakes or biscuits other than biscuits wholly or partly covered with chocolate or some product similar in taste and appearance.”
• Note 5 of Grp. 1, Sch. 8, VATA 1994 (“Note 5”) clarifies that, among other things, “confectionary” includes: “sweetened prepared food which is normally eaten with the fingers”.

Previous Cases

• The case has been through the First-Tier Tribunal (“FTT”), the Upper Tribunal (“UT”), the Court of Appeal (“CoA”), and has now been remitted back to the FTT.
• Without going into unnecessary detail, the current position derives from the CoA overruling the UT’s interpretation of Note 5.
• The CoA’s position on Note 5 is that any product which is sweetened prepared food which is normally eaten with the fingers is confectionary by default, unless this would produce an absurd result (for example, chilli chicken skewers).
• It is unilaterally accepted that the giant marshmallows are sweetened prepared food, the CoA have merely remitted the case back to the FTT to determine whether giant marshmallows are “normally eaten with the fingers”, as this was not a point the FTT originally determined.

Decision

• In this case, there are two routes open to show that giant marshmallows are confectionary. They can be confectionary within the ordinary meaning of the word, or they can fall within Note 5 (sweetened prepared food normally eaten with the fingers).
• The original FTT decision has already closed the first route primarily because the giant marshmallows are generally roasted after purchase but before consumption. As such, the only available route in this case is whether the giant marshmallows are normally eaten with the fingers.
• As such, the FTT first considered the meaning of “normally eaten with the fingers”, and were referred to the judgment of the VAT and Duties Tribunal in (2003) Unibev Limited VAT Decision 18437 which considered that the phrase sweetened prepared food which is normally eaten with the fingers “simply means such food which is not normally eaten with the assistance of a knife and fork or a spoon or some other implement such as chopsticks” and did not depend on whether items needed to be unwrapped.
• This, however, did not address the effect of the word “normally” in Note 5. The FTT concluded that “normally” (in this context) requires that the giant marshmallows are more often eaten with the fingers (i.e. more than 50%).
• HMRC had argued that the burden of proof is on the appellant to show that giant marshmallows are not normally eaten with the fingers. However, the FTT held that, first, they must attempt to make a rational finding in relation to the dispute (being a question of fact). Only if the FTT failed in rationally deciding the case would the issue of who bears the burden of proof arise.
• As such, the FTT noted that there were four ways of eating the giant marshmallows:
  1. Roasted on a skewer (including a stick) and eaten from the skewer (“Way A”).
  2. Roasted on a skewer, taken off the skewer after cooling and eaten with the fingers (“Way B”).
  3. Roasted on a skewer, inserted in between biscuits with chocolate and eaten as a s’more (“Way C”).
  4. Eaten straight from the pack with the fingers (“Way D”).
• Ways B and D constitute eating with the fingers and Ways A and C do not. Way C was somewhat controversial, but the FTT eventually held that, because the marshmallow itself is between biscuits, the marshmallows are not being eaten with the fingers but with the biscuits functioning as implements.
• The FTT held that, when roasted on a skewer, on the basis that structural integrity is damaged, the marshmallows are more likely to be eaten directly from the skewer than taken off the skewer and eaten with the fingers, i.e. Way A > Way B.
• Moreover, on the basis that if a consumer wanted to eat marshmallows with their fingers directly from the packet, they would purchase regular and not giant marshmallows, i.e. Way C > Way D.
• In summary, the FTT held that:
  “For the above reasons, we find that 1) Way A, eating direct from the skewer, is more frequently used than Way B, taking from skewer and eating with fingers; 2) Way C, s’more, is more frequently used than Way D, unroasted from the packet. It therefore follows that in aggregate, we find as a fact that that the Product is more frequently eaten by one of the nonfinger ways than by one of the with-the-fingers ways. To put it in mathematical formulation, because A > B and C > D, (A + C) > (B + D).”
• As such, the giant marshmallows are not confectionary by virtue of Note 5 and the original FTT decision already held giant marshmallows are not confectionary in the ordinary sense.
• Consequently, the FTT held that giant marshmallows are zero-rated for VAT purposes by virtue of Item 1, Grp. 1, Sch. 8, VATA 1994 and that they did not fall within Excepted Item 2. As such, the taxpayer won.

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