Mega Marshmallows VAT case: what food businesses can learn from the latest confectionery ruling

At the centre of the case was a simple question: should Mega Marshmallows be treated as zero-rated food or standard-rated confectionery for VAT purposes?

The First Tier Tribunal found in favour of the taxpayer, concluding that Mega Marshmallows were not normally eaten with the fingers and should therefore remain zero-rated. That finding matters because confectionery is standard-rated for VAT at 20%, while many food products are zero-rated.

For businesses developing new products, particularly in the snack, health food, protein, lunchbox and ‘better for you’ categories, the case is a reminder that VAT classification should not be left until after launch. The answer can affect pricing, margins, retail competitiveness and the risk of future HMRC challenge.

The VAT issue: food or confectionery?

UK VAT law generally zero-rates food for human consumption, but there are important exceptions. One of the best-known exceptions is confectionery.

Confectionery includes chocolates, sweets, biscuits, drained, glacé or crystallised fruits, and any item of sweetened prepared food which is normally eaten with the fingers.

That final phrase is where much of the uncertainty sits.

Many modern snack products are sweet, prepared and handheld. That does not automatically mean every product will be treated in the same way, but it does mean HMRC may look carefully at how the product is made, presented, marketed and eaten.

The Mega Marshmallows case turned on the real-world evidence. The product was larger than a standard marshmallow and was commonly bought for roasting, use in s’mores or eating from a skewer, rather than being eaten straight from the bag like a traditional sweet.

That distinction was enough for the Tribunal to conclude that the product was not normally eaten with the fingers.

Why “normally eaten with the fingers” is a modern problem

When the rules around confectionery were developed, the food market looked very different. For many consumers, confectionery meant a chocolate bar, a packet of sweets or a treat bought from a newsagent or corner shop.

Today, the line is much harder to draw.

Consumers now buy protein bars, fruit bars, cereal bars, coated nuts, dried fruit snacks, energy bites, lunchbox products and hybrid bakery products. Some are marketed as indulgent treats. Others are sold as healthier alternatives. Many are eaten on the go. Many are handheld. Many sit near the boundary between food and confectionery.

That creates a problem for businesses and consumers.

A product may be made with fruit, seeds, oats or other ingredients associated with healthier eating, but still fall within the confectionery rules if it is sweetened, prepared and normally eaten with the fingers. Conversely, a product that looks sweet may be zero-rated if the evidence shows it is used as an ingredient or is not normally eaten in that way.

This is where the rules can feel out of step with the modern food market.

The dried fruit question

Dried fruit is a useful example of how confusing the rules can be.

Naturally sweet dried fruit may be zero-rated if sold for snacking AND baking. However, dried fruit sold for snacking alongside confectionery should be treated as confectionery in HMRC’s view, meaning they are standard-rated.

From a consumer perspective, that distinction can be hard to understand. A parent buying a dried fruit-based snack may view it as a healthier lunchbox option. A challenger brand may position it as an alternative to traditional sweets. But the VAT analysis may still look at whether the product has become a prepared, sweet, hand-held snack.

That can lead to difficult commercial outcomes.

A healthier product can be more expensive to produce than a traditional sweet. Smaller food businesses may already be dealing with higher ingredient costs, shorter production runs, retail listing fees and marketing costs. If VAT at 20% must also be built into the price, the business may have to choose between absorbing the cost or passing it on to consumers.

Neither option is easy.

Why VAT classification is a commercial issue

For food businesses, VAT classification is not just a technical matter for the finance team. It can shape the commercial model of a product.

If VAT is incorrectly charged when it is not due, the product may be less competitive. If VAT is not charged when HMRC later decides it should have been, the business may face assessments, interest and penalties. If a product is launched before the VAT position is reviewed, it can be difficult to change pricing, packaging or customer messaging later.

This is particularly important for businesses selling direct to consumers, through supermarkets or through online marketplaces, where VAT often forms part of the final shelf price.

It also matters for investors and acquirers. A food brand with an uncertain VAT position may carry hidden risk. Where the business has scaled quickly, that risk can become material.

What HMRC and tribunals look at

The Mega Marshmallows case shows that VAT classification depends on the facts. Businesses should expect HMRC to look at the product in the round.

Relevant factors may include:

• the ingredients and recipe;
• the size, shape and texture of the product;
• whether it is eaten as sold or prepared before eating;
• whether it is marketed as a snack, treat, ingredient or baking product;
• the packaging and product photography;
• supermarket aisle placement;
• website descriptions and social media content;
• customer reviews and usage evidence;
• seasonality and sales patterns;
• how a typical consumer would normally eat the product

No single factor will always be decisive. However, taken together, these points can influence whether a product is treated as zero-rated food or standard-rated confectionery.

Practical steps for food manufacturers, importers and retailers

Businesses launching or selling borderline food products should review the VAT position early.

That review should ideally happen before packaging is finalised, before customer-facing website copy is written and before the product is listed with retailers. Once a product is in the market, its VAT treatment may be harder to defend if the commercial evidence points in a different direction.

Businesses should consider:

1. Reviewing VAT liability before launch

New snack, bar, dried fruit, bakery and confectionery-adjacent products should be reviewed before pricing is agreed.

2. Checking packaging and marketing claims

Words such as “snack”, “treat”, “sweet”, “bar”, “bite” or “confectionery” can influence perception. So can images showing how the product is eaten.

3. Keeping evidence of customer use

Reviews, recipes, usage data and sales patterns may help show how a product is normally consumed.

4. Considering retailer placement

A product sold in a baking aisle may be perceived differently from one sold in a confectionery aisle, although aisle placement is only one factor.

5. Documenting the VAT decision

Businesses should keep a clear record of the analysis behind the VAT treatment, including why the product is zero-rated or standard-rated.

6. Reviewing existing product ranges

As HMRC continues to test the boundaries of food VAT rules, businesses should review established products as well as new launches.

What this means for healthier snack brands

The wider concern is that the VAT rules may penalise businesses trying to create alternatives to traditional confectionery.

A product designed to be a healthier option may still be treated as confectionery for VAT purposes. That can make it harder for challenger brands to compete, particularly where they are already working with higher production costs and lower margins.

This creates a policy question as well as a tax question. If the Government wants consumers to make healthier choices, the VAT system should not make those choices harder to produce, sell or afford.

The Mega Marshmallows case does not solve that wider issue. However, it does highlight the need for HMRC to apply the rules in a way that reflects how food is bought and consumed today.

Key takeaway

The Mega Marshmallows VAT case is not just about marshmallows. It is about how old VAT rules apply to a modern food market.

For food manufacturers, importers and retailers, the practical message is clear: if a product is sweet, prepared and hand-held, the VAT position should be reviewed carefully. That is especially important for snacks, fruit bars, cereal bars, protein products, lunchbox foods and healthier alternatives.

VAT classification can affect pricing, margin, investment, retailer relationships and HMRC risk. Getting the position right at the start is far easier than trying to fix it later.

For support with VAT liability reviews, food product classification or HMRC enquiries, contact Blick Rothenberg’s Indirect Tax team.