Rocky road for snack manufacturers on VAT treatment

17 April 2024

Another decision has emerged from the tax tribunals on the VAT treatment of sweet snacks, this time finding that giant marshmallows for roasting over a barbecue or campfire are VAT free. But, despite three rulings so far in 2024 alone on what is or isn’t ‘confectionery’, there are still few hard and fast answers for retailers and manufacturers trying to confirm the VAT position of their products.  

What is confectionery? 

Food is usually zero-rated for VAT purposes, although there are several exceptions to this rule. One of these is ‘confectionery’, which is subject to VAT at 20%. Confectionery is described in the law as including “chocolates, sweets and biscuits; drained, glace or crystallised fruits; and any item of sweetened prepared food which is normally eaten with the fingers”. But this definition isn’t much more than a starting point for businesses who need to work out whether their product attracts VAT and disputes with HMRC are common. 

Mega Marshmallows, Nakd bars, Organix bars and Duel Fuel energy bars

One of these disputes involved Innovative Bites, a wholesaler of American sweets and treats which sells products to UK supermarkets and other retailers. This concerned the VAT treatment of Mega Marshmallows, which were around twice the size of a typical marshmallow and designed to be roasted over a campfire or barbecue and then eaten as part of an American s’more (a roasted marshmallow and a layer of chocolate eaten between two digestive biscuits). 

The Upper Tribunal has now supported an earlier ruling by the First-tier Tribunal that this was not confectionery and could be zero-rated. Unlike mini marshmallows, which are subject to VAT, Mega Marshmallows were described on their packaging as suitable for roasting and this was supported by the positioning of the product in the world foods aisle of supermarkets rather than the confectionery aisle. The tribunal also accepted evidence that the product was more likely to be purchased in the summer months, which it saw as an indication that it was more likely to be eaten outside over a barbecue or campfire than straight from the packet as a sweet snack.

This contrasts with the very recent decision in WM Morrison, where Nakd bars and Organix bars, marketed as a healthier alternative to conventional snack bars, were 'confectionery' because they have the appearance, texture, mouthfeel, density and taste of confectionery, and they would be regarded as confectionery by the “informed ordinary person in the street”. The tribunal in that case thought packaging and positioning of the product in stores was only of secondary importance. 

The tribunal has also ruled earlier this year that Duel Fuel flapjacks, brownies and cake slices, designed as energy/recovery snacks for athletes, are subject to VAT. Despite their healthy purpose, the tribunal agreed with HMRC that they nevertheless met the definition of confectionery because they were “sweetened prepared food that is normally eaten with the fingers”. As a result, the manufacturer, who had taken VAT advice during the process of developing the product with the aim of creating a zero-rated food item, was forced to shelve the product because adding VAT to its price would make it too expensive for its target market – losing money on development costs and early sales before HMRC ruled against it. 

The food industry’s predicament

Despite the deluge of litigation on this point in 2024, this is far from a new problem for the food industry – there have been dozens of appeals over the years on whether various items are ‘confectionery’, not to mention countless others on the VAT treatment of other food items, but little consistency has emerged. 

Retailers and manufacturers need to clearly understand, preferably at an early stage, whether or not they must charge VAT on a new product. As we can see from the cases above, this affects pricing and even the viability of a new product, which might not be able to compete in its section of the marketplace with 20% VAT added to the cost. 

HMRC can be slow or even reluctant to give rulings, leaving businesses navigating a rulebook that is not only decades out of date (in some aspects based on the marketplace as it was when VAT was first introduced in 1973), but also has no clearly stated purpose.

A casual reading of the legislation suggests that its general intention is for most food to be zero rated, but that VAT should apply to hot takeaways and treats like chocolate and crisps. But there is no healthy food/junk food distinction specified in the law and the small print doesn’t always support that assumed logic either, for example chocolate cakes, cream buns and frozen pizzas are all zero-rated.

Not for the first time, we find ourselves urging a major overhaul of the current VAT rules on food to avoid wasting the time of HMRC, businesses and the courts on such subtle distinctions for no good reason. Our eating habits are now very different from 50 years ago – the rules need a major update, headed up by a clear and well-defined purpose for applying VAT to some food and not to others.

Sarah Halsted
Sarah Halsted
Technical Associate Director
Sarah Halsted
Sarah Halsted
Technical Associate Director