A Marshmallow Sparks a £472,000 Lawsuit: Did HMRC Actually Lose?
- TBA
- 6 days ago
- 4 min read
The British supermarket giant Morrisons previously lost a VAT dispute with HM Revenue & Customs over rotisserie chicken, facing a clawback of around £17 million—a massive sum that shook the food retail sector.
If the chicken case was surprising, the 'marshmallow case' takes the absurdity of the UK food VAT system to new heights. It took four tribunal hearings, a detour to the Court of Appeal, a mathematical formula, and nearly £473,000 in disputed tax to answer one single question: is a marshmallow considered confectionery?
A years-long VAT dispute - Marshmallow
If you have a sweet tooth or frequent the snack aisles of British supermarkets, you might be familiar with Mega Marshmallows.
For years, HMRC and the manufacturer, Innovative Bites Limited, were locked in a legal battle over whether these marshmallows are confectionery.
HMRC argued that these marshmallows are 'normally eaten with the fingers' and therefore classify as confectionery, subjecting them to the standard 20% VAT rate. The manufacturer, however, maintained that this specific product is intended to be roasted over a fire, making it 'food' eligible for zero-rating.
The case was remitted back to the First-tier Tribunal by the Court of Appeal in recent years. Following four tax hearings, the judge ultimately sided with the manufacturer, confirming the zero-rated status of the marshmallows. The tribunal's key reasoning was that these marshmallows are not typically eaten straight from the hand.
Investigations highlighted that these giant marshmallows are usually 'cooked'. People skewer them for roasting and may even handle them with tongs, rather than eating them directly with their fingers. Consequently, they do not meet the statutory definition of 'confectionery' and are zero-rated.
The result: HMRC lost.
The method of consumption is key
During earlier hearings, it had already been largely established that the product was not 'traditional confectionery'.
Thus, the sole issue in the final hearing focused on a seemingly simple yet highly contentious point: how do people usually eat these giant marshmallows?
The tribunal analysed the consumption methods in detail, even examining the cooking process. The ruling noted that giant marshmallows are typically roasted over a barbecue or open fire using a skewer or tongs.
Once roasted, the inside turns into a molten state encased in a caramelised shell, making the structure too soft and sticky to handle directly. Unlike standard marshmallows, they do not fit the description of being 'normally eaten with the fingers'.
A mathematical formula enters the argument
Beyond settling a dispute that spanned several years, one of the most surprising aspects of this case was the tribunal's use of a mathematical formula to support its conclusion.
The tribunal categorised the consumption methods into four types:
A: eaten directly from the skewer
B: taken off the skewer and eaten with fingers
C: made into a ‘s'more’ (a toasted marshmallow sandwich)
D: eaten unroasted straight from the bag
For Mega Marshmallows, the judge determined that:
Method A is more frequent than Method B
Method C is more frequent than Method D
This led to the conclusion: (A + C) > (B + D)
In other words, consumers more frequently eat the product without using their bare fingers.
This mathematical expression became a crucial piece of evidence in ruling that the product is not 'confectionery'.
The subsequent impact
Ultimately, the tribunal ruled in favour of the appeal, meaning HMRC lost the case. This outcome allowed Innovative Bites Limited to successfully reclaim their previously rejected VAT refund of £472,928, which covered the period between 2015 and 2019.
At the time of the final ruling in early 2024, HMRC had a 56-day window to consider a further appeal. However, as we look back from 2026, the decision firmly stood, closing the chapter on this saga and cementing a significant victory for the manufacturer.
The VAT paradox
Whether it is Morrisons' rotisserie chicken, roasting marshmallows, KFC dipping sauces, or the hotly debated Marks & Spencer strawberry and cream sandwiches, the UK's food VAT system is full of anomalies that often border on the farcical:
Cold croissants: 0%
Croissants kept under a heated lamp: 20%
Pasties labelled as freshly baked: 0%
Pasties labelled as hot: 20%
Standard marshmallows: 20%
Giant roasting marshmallows: 0%
Chocolate-covered biscuits: 20%
Chocolate-covered cakes: 0%
All these disputes stem from the complex structure of the Value Added Tax Act 1994, which means that food is generally zero-rated. However, excepted items such as confectionery are standard-rated.
Yet, there are exceptions to the exceptions.
This convoluted structure has been aptly described as a 'Russian doll tax system'.
As a result, HMRC and businesses are forced to argue in court over ingredient ratios and preparation methods—debating whether an item is 'normally eaten with the fingers', whether it hardens or softens, its potato content, or whether it is 'intended to be heated'.
The view from TB Accountants
Although this specific case offers limited direct precedent for other food manufacturers, it is highly likely that similar VAT disputes will continue to arise as food formats and consumption habits evolve.
For businesses, every legal precedent offers valuable, practical lessons:
Do not blindly accept HMRC's initial assessment. Innovative Bites lost their initial case but eventually won through persistence.
Evidence is paramount. Packaging, marketing, shelf placement, and usage methods are all critical pieces of evidence.
Conduct early tax assessments. A few hundred pounds spent on professional advice can save hundreds of thousands in litigation costs.
Borderline products present opportunities. A 20% difference in tax rates can determine a product's market competitiveness.
If you are operating in or planning to enter the UK food sector and have questions regarding VAT rates, returns, or refunds, please contact us for expert support.
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