Food Wholesaler Overturns HMRC VAT Assessment (Innovative Bites Ltd v HMRC 2026)

In a decision that will be welcomed by food businesses across the United Kingdom, the First-tier Tax Tribunal (FTT) has again ruled in favour of Innovative Bites Ltd on remittal after the Court of Appeal allowed HMRC’s appeal and sent the case back for reconsideration, confirming that its oversized ‘Mega Marshmallows’ are zero-rated for VAT as food and do not constitute confectionery.

The case raises important questions about how UK VAT law determines the classification of food products, what ‘confectionery’ really means within Schedule 8 to the Value Added Tax Act 1994 (VATA 1994), and what practical lessons businesses can take from a dispute that turned quite remarkably on how a marshmallow is typically eaten. For any business operating in the food sector that is subject to HMRC scrutiny over VAT classification, this case is essential reading. Our specialist team at LEXLAW Solicitors & Barristers regularly advises on complex VAT disputes and HMRC tax assessments.

Background: What Is Innovative Bites Ltd and Why Did HMRC Assess Them?

Innovative Bites Ltd is a UK wholesaler of American-style sweets and treats. Among its product range are ‘Mega Marshmallows’ marshmallows substantially larger than the standard UK market variety. The product is marketed primarily as a campfire or barbecue food, intended to be roasted on a skewer or stick before being consumed or incorporated into the American treat known as a ‘s’more’: a sandwich of roasted marshmallow and chocolate pressed between two biscuits.

On 14 August 2019, HMRC issued assessments to Innovative Bites Ltd covering VAT periods between June 2015 and June 2019, totalling £472,928. HMRC’s position was that Mega Marshmallows fell within the definition of ‘confectionery’ under Note 5 to Group 1 of Schedule 8 VATA 1994, attracting the standard rate of VAT at 20%, rather than being zero-rated as food.

The statutory definition at the heart of the dispute is contained in Note 5, which provides that ‘confectionery’ includes “chocolates, sweets and biscuits; drained, glacé or crystallised fruits; and any item of sweetened prepared food which is normally eaten with the fingers.” HMRC argued that Mega Marshmallows were ‘sweetened prepared food normally eaten with the fingers.’ Innovative Bites disagreed and ultimately, the Tribunal agreed with the taxpayer.

Read the Full Judgment Below:

The Litigation Journey: FTT, Upper Tribunal, Court of Appeal, and Back Again

The case has had an unusually complex litigation history, passing through four separate hearings at three levels of the UK’s tax and judicial hierarchy before arriving at its final resolution.

First-tier Tribunal (September 2022): The original FTT found in favour of Innovative Bites, concluding that Mega Marshmallows were not confectionery in the ordinary sense. The Tribunal applied a multi-factorial assessment considering the product’s size, its marketing as a roasting product, its packaging, its positioning in supermarket aisles (barbecue and world foods sections), and the seasonal fluctuation in its sales. The FTT notably stated that it did ‘not give particular weight to the means of eating.’

Upper Tribunal (April 2024): HMRC appealed. The Upper Tribunal upheld the FTT’s decision, finding that the statutory definition in Note 5 was non-conclusive and that contextual factors including how a product is marketed and consumed could influence its VAT classification. HMRC pressed further.

Court of Appeal (March 2025): In March 2025, the Court of Appeal allowed HMRC’s appeal and held that the key question was whether the product was ‘normally eaten with the fingers. Lord Justice Newey, giving the principal judgement, held that Note 5’s reference to ‘sweetened prepared food normally eaten with the fingers’ was the determining statutory test, and that the FTT had not properly resolved whether Mega Marshmallows satisfied it. The Court remitted the case to a differently constituted FTT with specific directions to determine, on the existing evidence, whether the product was ‘normally eaten with the fingers.’

This remittal was significant. It stripped away the multi-factorial analysis and narrowed the question to a single, focused factual enquiry: does the product meet the statutory criterion? The stage was set for the FTT’s definitive 2026 ruling.The First-tier Tribunal ultimately ruled in favour of Innovative Bites Ltd, holding that its “Mega Marshmallows” are not confectionery for VAT purposes as a result, the product qualifies as zero-rated food, and HMRC’s £472,928 VAT assessment was overturned in full, bringing the long-running dispute to a close.

If you face a similarly contested VAT assessment from HMRC, our team at taxdisputes.co.uk can advise on your prospects at every stage of the appeals process.

Why Does This Case Matter? Implications for Food Business VAT Classification

This decision is of broader significance for food businesses and their advisers across the UK. It provides important guidance on how the ‘confectionery’ exception to food zero-rating operates in practice.

1. The ‘normally eaten with the fingers’ test is a concrete factual enquiry. The Court of Appeal’s 2025 judgment confirmed that the key statutory test under Note 5 VATA 1994 is primarily a factual question about how a product is ‘normally’ consumed. The 2026 FTT decision demonstrates that tribunals will conduct a granular, evidence-based analysis of actual consumer behaviour counting and weighing the different modes of consumption rather than relying solely on the product’s physical characteristics or general perception.

2. Context and purpose of consumption are legally relevant. The predominantly culinary or cooking-ingredient function of Mega Marshmallows was central to the FTT’s reasoning in 2022 and remained relevant to the remitted hearing. Businesses whose products have a primarily cooking use even if they are physically capable of being eaten with the fingers may be able to challenge HMRC’s confectionery classifications on similar grounds.

3. Marketing, packaging, and retail positioning carry real evidential weight. From the very first hearing, the FTT gave weight to Mega Marshmallows’ marketing as a campfire food, their placement in the barbecue and world foods sections of supermarkets, and the seasonal pattern of their sales. For food businesses, this underlines the importance of ensuring that a product’s presentation is consistent with its intended use and that this evidence is preserved and documented from the outset.

4. Even if HMRC issues an assessment, it can be successfully challenged. This case demonstrates that HMRC’s VAT assessments even where the legal arguments are sophisticated and well-resourced can and do fail when challenged by appropriately advised taxpayers. A specialist VAT and tax dispute solicitor will conduct a thorough analysis of your position and advise on the realistic prospects and economics of an appeal before a penny is spent on litigation.

What Should Your Business Do If HMRC Challenges Your VAT Classification?

If your business has received a VAT assessment from HMRC, or if you are concerned that HMRC may challenge the VAT treatment of one of your products, the following steps are essential.

Act promptly – strict time limits apply. Under section 83G VATA 1994, a taxpayer must notify HMRC of an appeal within 30 days of a VAT assessment (subject to the possibility of requesting a review). The First-tier Tribunal imposes its own procedural deadlines. Missing these deadlines can prevent an otherwise meritorious appeal from proceeding.

Gather and preserve evidence of how your product is actually used. The Innovative Bites case demonstrates that factual evidence of consumer behaviour marketing materials, packaging, retailer positioning, social media content, survey evidence, and witness evidence is legally significant and potentially determinative. This evidence should be compiled and preserved from the moment you first become aware of a dispute.

Consider requesting a statutory review before appealing to the Tribunal. HMRC offers a statutory review process under section 83C VATA 1994, in which an independent HMRC officer reviews the original decision. This can result in the assessment being reduced or cancelled without the cost and delay of tribunal proceedings, and can be a valuable first step.

Instruct specialist VAT and tax litigation solicitors. As the Innovative Bites case vividly illustrates, VAT classification disputes can become extraordinarily complex and expensive if not managed carefully. Instructing specialist lawyers at LEXLAW Solicitors & Barristers or our dedicated tax disputes team ensures that you receive advice on merits, strategy, and funding options from the outset, before significant costs are incurred.

How We Can Help with VAT Disputes
The Innovative Bites case highlights just how quickly VAT classification disputes can escalate in complexity and cost without the right approach. By instructing our specialist team, you gain early access to expert advice on the merits of your position, the most effective strategy, and potential funding routes before substantial costs arise. We take a proactive, commercially driven approach to safeguarding your interests and strengthening your ability to successfully challenge decisions made by HM Revenue & Customs.