As a CFO navigating the VAT minefield, few things sharpen your focus like a seven-year battle over marshmallows. Innovative Bites Limited v HMRC [2026] UKFTT 500 (TC) just delivered a taxpayer win, overturning £473k in assessments. Mega Marshmallows – giant, roasting-ready puffs – are zero-rated food, not standard-rated confectionery. Why? Because they’re not normally eaten with the fingers. This saga exposes HMRC’s rigid classifications versus real-world use. For CFOs, it’s a playbook on evidence, appeals, and protecting cash flow.
The Mega Marshmallow Odyssey: From FTT to Court of Appeal and Back
The dispute kicked off in 2019 over supplies from June 2015–June 2019. HMRC hit Innovative Bites with £472,928 in back VAT, claiming the oversized mallows (5cm high, 3.5–4.5cm diameter) were confectionery per Note 5, Group 1, Sch 8 VATA 1994: “sweetened prepared food which is normally eaten with the fingers.”
Initial FTT 2022 [UKFTT 352 (TC)] sided with the taxpayer: not confectionery in ordinary meaning, given size, packaging (‘perfect for roasting, s’mores’), supermarket placement (world foods/BBQ aisles), and seasonal sales spikes (65% May–Oct). Ross Martin called it a multi-factorial win.
Upper Tribunal [2024] UKUT 95 (TCC) upheld. But Court of Appeal [2025] EWCA Civ 293 remitted: FTT dodged the ‘fingers’ fact. New FTT panel only. StratoTax noted the narrow pivot.
“Normally Eaten with Fingers”: The Decisive Fact-Fight
FTT 2026 zoomed on four consumption modes:
- Way A: Roasted on skewer, eaten off it (no fingers).
- Way B: Roasted, cooled, fingers (fingers).
- Way C: Roasted into s’mores (biscuits as ‘implement’ – no fingers).
- Way D: Raw from pack (fingers, but rare).
“Normally” = >50%. Evidence (packaging, sales, displays) showed A+C > B+D. S’mores count non-finger. Burden on taxpayer met. Assessments quashed. Tax Disputes highlights evidence primacy.
CFO Playbook: Five Actionable Takeaways
1. Evidence Trumps Labels. Marketing, placement, seasonality proved intent. Audit your borderline products (large sweets? Cooking gels?) with consumer data. ClariTax stresses surveys/recipes.
2. Finger Test is Literal. Jaffa Cakes 2.0 – use defines rate. Test: fork/skewer? Ingredient? Zero-rate potential. ACCA draws parallels.
3. Appeals Pay – But Costly. Multi-level persistence won. Factor legal fees vs exposure. HMRC may appeal; monitor Temple Tax.
4. Time Limits Loom. Four-year reg 29 VATR – but disputes extend. Provisional claims? Risk penalties.
5. Broader Food VAT Risks. Review portfolios: baking minis zero-rated, snacks standard. Galloways flags strategy.
HMRC’s Next Move and Your Exposure
HMRC could UT appeal, but facts bind. CFOs: stress-test classifications quarterly. Non-compliance? Cash flow hits. This isn’t sweets – it’s serious margin protection.
Contact me at Tanous for a VAT health check. Let’s turn tribunal lessons into your edge.
Mark Hendy
CFO, Tanous Limited
mark@tanous.co.uk | tanous.co.uk