The Commissioners for HMRC v Innovative Bites Limited

Value Added Tax Act 1994, Schedule 8, Group 1, Note 5 is an inclusive and enlarging definition of confectionery. It is not a deeming provision and does not conclusively classify a product merely because it appears to meet one of its descriptions.

The tribunal should generally begin with Note 5. A product readily within a listed description will ordinarily be standard-rated, but relevant contrary facts may require a multi-factorial assessment. If it is outside Note 5, the tribunal must consider the wider ordinary meaning of confectionery in Item 2, usually by such an assessment. Marketing and sale are potentially relevant factors. An appellate tribunal will not interfere with the fact-finding tribunal’s evaluative conclusion unless it discloses an error of law.

HMRC appealed from the First-tier Tribunal decision released on 21 September 2022 (TC/2019/06287). The First-tier Tribunal had allowed Innovative Bites Ltd’s appeal against VAT assessments totalling £472,928 and held that its Mega Marshmallows were zero-rated food rather than standard-rated confectionery.

The product was marketed, packaged and sold as suitable for roasting. HMRC contended that Note 5 to Group 1 of Schedule 8 to the Value Added Tax Act 1994 deemed any item within its listed descriptions to be confectionery. It also challenged the First-tier Tribunal’s factual inferences about consumer use, marketing, seasonal sales and supermarket placement.

The central issues were the legal effect of Note 5 and whether the First-tier Tribunal had made a material error of law in its multi-factorial classification of the product.

1. Appeal dismissed. The First-tier Tribunal made no material error of law in concluding that Mega Marshmallows were not confectionery and were therefore zero-rated.

2. Note 5 to Group 1 of Schedule 8 to the Value Added Tax Act 1994 is not a deeming provision. Its language, legislative history and its function under section 96(9) show that it is an inclusive, enlarging definition used when construing Item 2. It does not create a legal fiction or exclude further findings of fact.

3. The proper approach is structured but fact-sensitive. The tribunal should first consider whether the product falls within a Note 5 description. That may require a multi-factorial assessment. If it does, it will ordinarily be treated as confectionery unless other relevant factors point away from that classification. If it does not, the tribunal must assess whether it falls within the wider ordinary meaning of confectionery in Item 2; this will usually require a multi-factorial assessment.

4. There is no universal requirement for an elaborate multi-factorial assessment. Some products, such as an ordinary packet of sweets or box of chocolates, can readily be classified. Where classification is not readily ascertainable, the tribunal may consider relevant matters including the product’s nature, intended use, packaging, marketing, positioning and sales pattern.

5. The First-tier Tribunal was entitled to regard roasting, the product’s size, packaging, marketing, supermarket placement and seasonal sales as relevant. Marketing is potentially relevant in every case; direct evidence of consumer use is not a precondition where the tribunal relies on a wider evidential picture. Its evaluative conclusion was open to it, and HMRC did not establish an Edwards v Bairstow error.

• Upper Tribunal (Tax and Chancery Chamber): dismissed HMRC’s appeal and upheld the First-tier Tribunal’s conclusion that the supplies were zero-rated.
• First-tier Tribunal (Tax Chamber): on 21 September 2022, allowed the taxpayer’s appeal against HMRC’s VAT assessments (TC/2019/06287).