Summary
This month we have two food related case reports from the First Tier Tribunal (FTT). Firstly, the dispute on giant marshmallows which was remitted back to the FTT by the Court of Appeal has been decided in favour of the taxpayer with the Tribunal finding the marshmallows are “not ordinarily eaten with the fingers”. This means they are not confectionery, so are zero rated. We will soon see if this is the end of the matter. Secondly, the FTT has found that wicker hampers containing a selection of zero-rated and standard rated food and drink are ancillary to the contents and not a separate standard rated supply.
HMRC has published its interim reaction to the Colchester Institute decision described last month, indicating a wait and see approach for affected colleges. HMRC has also published its detailed guidance on the new zero rate relief for items donated by businesses to charities.
News from the UK Courts and Tribunals
Upper Tribunal (UT)
First-tier Tax Tribunal (FTT)
TC 09831 Innovative Bites Ltd
The FTT has released the latest decision in this long running dispute, which considers whether giant marshmallows (sold under the brand name Mega Marshmallows) can be zero-rated under VAT A94 Sch 8 Group 1, or whether they are standard rated ‘confectionery’ (excluded from the zero-rate by Excepted Item 2 and Note 5 of Group 1).
In 2025, the Court of Appeal identified the key question in this dispute as whether Mega Marshmallows are ‘sweetened prepared food which is normally eaten with the fingers’ and that the FTT should have addressed this by hearing evidence/making findings on the way the marshmallows are normally eaten. It remitted the case to be reheard in the FTT to specifically address that question.
The FTT has now found that they are not normally eaten with the fingers which, subject to any further consideration in the Court of Appeal (or an HMRC appeal of the FTT's decision), would appear to confirm that the giant marshmallows are zero-rated. This conclusion is based on the following findings:
The FTT first found that “normally eaten with the fingers” requires the product to be eaten with the fingers more often than it is not eaten with the fingers – ie eaten with the fingers more than 50% of the time.
The FTT then considered the four ways in which the product could be eaten:
- Roasted on a skewer (or stick) and eaten from the skewer (ie not eaten with the fingers).
- Roasted on a skewer, taken off the skewer after it has sufficiently cooled and eaten with the fingers.
- Roasted on a skewer, inserted in the middle of two biscuits with a piece of chocolate and eaten as a s'more. (found to be not eaten with the fingers - see below)
- Eaten straight from the pack with the fingers.
When applying logic that would probably baffle anyone not immersed in the world of VAT, the FTT found that s’mores are not eaten with the fingers because it is the biscuits rather than the marshmallow that is being held in the hand. When eating a s'more, a person does not eat the (largely molten) marshmallow with the fingers; the biscuits are in effect implements by which it is eaten. Alternatively, when the roasted marshmallow is placed into the chocolate and biscuit sandwich to form a s'more, it is being used as an ingredient in the s'more, and thereafter it is not the marshmallow that it is being eaten, but the s'more. Therefore, the FTT believes the product is ‘eaten with the fingers’ under methods 2 & 4 and ‘not eaten with the fingers’ when consumed by methods 1 & 3.
The FTT then went on to find that the marshmallows are more often eaten by method A than method B. Once roasted the marshmallow becomes largely liquid within the caramelised outer skin and loses the structural rigidity needed to be held in the fingers. The FTT believes this makes it more likely that the product would be eaten from the skewer after roasting as the skewer will hold the product together and make it easier to eat.
It also thought the product would more often be eaten as part of a s'more (method 3) than straight out of the pack (method 4). The product is typically sold separately from confectionery, eg, in the world foods or barbeque section of a supermarket. Also, the giant marshmallow is double the size of a regular marshmallow, which is what makes it suitable as an ingredient of a s’more. A customer who wants to eat marshmallows as a savoury snack is likely to purchase regular rather than giant marshmallows.
Therefore, the FTT has concluded that the product is typically eaten by methods other than being held in the fingers and is zero rated.
Comment: We now await news of the Court of Appeal's reaction, or whether HMRC will appeal against the FTT's conclusions on how the product is normally consumed (which contradicts your editor's personal research on the subject).
TC 09843 Clearwater Hampers Ltd - wicker hampers containing food and drink – ancillary or separate supply?
The First‑tier Tribunal (FTT) has found in favour of Clearwater Hampers, holding that lidded wicker baskets used to present food and drink hampers are ancillary packaging, rather than a separate standard‑rated supply.
Clearwater sells gift hampers containing a mix of zero‑rated and standard‑rated food and drink items, which are not sold separately. It applies a composite VAT rate based on the relative value of the food and drink contents. While HMRC had previously accepted that cardboard boxes, bamboo trays and open wicker baskets were ancillary, it refused a £425,000 refund claim in relation to hampers sold in lidded wicker baskets, arguing that the baskets were separate standard‑rated supplies. Clearwater appealed.
Applying the principles in Card Protection Plan (CPP), the FTT concluded that the lidded basket was ancillary to the principal supply of food and drink, as it was not an end in itself but a means of better enjoying the main supply. The tribunal placed significant weight on the average consumer’s perspective, noting that the essence of the product was a gift of food and drink attractively and securely packaged. The basket’s function was to present and protect the contents, rather than to constitute a separate supply.
The FTT also considered a number of supporting factors, including:
- the relative value of the basket (£9–£15) compared with the overall hamper price (£95–£899);
- the fact that customers had no choice over the type of container used;
- that reusability of the basket did not prevent it from being ancillary (by analogy with other forms of reusable packaging); and
- HMRC’s acceptance that other containers used by Clearwater were ancillary.
The tribunal strongly rejected HMRC’s reliance on its own published guidance, concluding that statements in VAT Notices suggesting hampers or picnic baskets are always separate supplies have no basis in law. It also noted that a different conclusion might be reached if a container were worth more than the goods it contained.
Comment: This is a helpful taxpayer decision that directly undermines HMRC’s established policy on hampers and high‑quality packaging. While of particular interest to food and beverage businesses, it may also support arguments in other sectors where HMRC seeks to treat packaging as a separate supply rather than ancillary to the underlying goods.
Court of Justice of the European Union – Judgements
Case T-233/25 – Mokoryte - Romania
In a Romanian case involving and insolvent property developer whose supplier assigned its debt to a subcontractor, the Court has confirmed that only the original supplier who accounted for VAT may claim bad debt relief or a taxable amount adjustment under Article 90. Under EU law, an assignment of a debt does not transfer VAT adjustment rights.
This aligns with the UK position, where bad debt relief can only be claimed by the party that originally accounted for VAT to HMRC; if a debt is assigned, any relief should be claimed before the assignment.
Court of Justice of the European Union – Advocate General Opinion
Case T-268/25 - Sampension Livsforsikring A/S - Denmark
The Advocate General (AG) has issued an opinion on whether Denmark’s 100% common ownership requirement for certain VAT groups is compatible with Article 11 of the Principal VAT Directive (PVD).
The case concerns the Danish tax authority’s refusal to allow Sampension, an insurance company making exempt supplies (SL) to form a VAT group with its management subsidiary (SA), which it owned 94%, not 100%.
The PVD allows VAT grouping where members are closely linked financially, economically and organisationally. Existing case law suggests that majority ownership is normally sufficient to establish a financial link and the AG considers that a general 100% ownership requirement is too restrictive and cannot be justified under the first paragraph of Article 11.
However, the AG finds that the requirement may be justified under the second paragraph of Article 11, which allows member states to impose measures to prevent VAT avoidance, which can be interpreted broadly, or evasion.
The AG states that generating VAT advantages for exempt or non-business entities is not a purpose of VAT grouping; the primary aim is administrative simplification. The AG also rejects the idea that VAT grouping exists primarily to ensure organisational neutrality between in‑house and outsourced functions.
Whether Denmark’s rule is lawful ultimately depends on proportionality. The Danish national court will need to decide whether the 100% ownership requirement is necessary, or whether less restrictive measures could achieve the same anti‑avoidance aim.
Comment: The opinion gives member states wide discretion to limit VAT grouping where perceived non‑administrative tax advantages arise. Any impact depends on whether the Court of Justice endorses the AG’s reasoning in its final judgment.
Even if upheld, the decision would not be binding on the UK where there are restrictions on VAT groups. As a reminder, the UK does have restrictions on membership of a VAT group where the majority profits (benefits) accrue a body that does not hold majority voting rights or for the (ill defined) 'protection of the revenue'.
Other news from HMRC
On 27 April 2026 HMRC Published Revenue and Customs Brief 3 (2026): VAT treatment of certain public funds received by further education institutions in response to the Court of Appeal Decision in Colchester Institute Corporation.
The salient points would appear to be:
- HMRC has decided not to appeal Colchester Institute any further.
- It will consult with stakeholders and confirm any policy change in another brief, which will be accompanied by updated guidance.
- Since the position of this funding was first thrown into question by the Colchester decision (in 2020), HMRC has given FE colleges the option of treating the income as consideration for a supply or continuing to treat their education as a non-business activity.
- For those currently treating the funding as non-business, HMRC says that any change to the VAT treatment of this funding will only be applied from a prospective date, yet to be announced. Those institutions can continue to use any appropriate reliefs (this presumably refers to the zero-rate relief for buildings put to a relevant charitable purpose and the reduced rate of fuel and power) until the date of any change, and HMRC will not revisit these after the date of any change.
- HMRC say that those who have already opted to treat this funding as business income should continue to do so. These FE institutions should not have continued to apply the above reliefs and HMRC will take ‘any appropriate action’ in respect of this. They should also consider whether are within scope of the new standard rate for private education.
So, change is coming, but we don't yet know when. This will be a prospective change for those who are currently using the non-business approach, and HMRC has indicated that it won't assess retrospectively for charitable reliefs claimed before the date takes effect. For further guidance, get in touch with your usual Grant Thornton contact.
How VAT affects charities (VAT Notice 701/1)
HMRC has updated its public notice to include details of the new VAT relief for business donations of goods to charity, which came into force on 1 April 2026. The new information can be found in sections 5.5.5 et seq. At the time of writing, HMRC does not appear to have updated its internal guidance manuals to cover this change to the rules.
The new relief, first announced in the 2025 Autumn Budget, applies to low value goods which businesses donate to charities for the charities to give away free of charge to people in need. Its objective is to remove a VAT charge that discouraged businesses from donating surplus stock or assets to charity (eg, to food banks, community centres, refuges and shelters), often causing those goods to be destroyed or sent to landfill before the end of their usable lifespan.
Under the previous rules, businesses had to account for VAT (or reverse the input tax they had previously recovered on those goods at the time of acquisition) when giving goods away in those circumstances. The new relief has been introduced by amending VATA94 Sch 4 para 5 which covers the VAT treatment of the disposal of business assets as business gifts. This now includes a new ‘qualifying charitable donation’ exception to the deemed supply rules for business goods donated free of charge to charities.
Thresholds and valuation
HMRC has already confirmed that the relief will apply according to goods below the following valuation thresholds:
Any goods valued at £100 or less (excluding alcohol, tobacco or vapes which are not eligible for the relief)
The following goods, provided they are valued at £200 or less:
- household appliances (including cookers, fridges, washing machines, dryers and heaters)
- furniture, including mattresses
- flooring (including carpets and rugs)
- computers, tablets and mobile phones
The public notice now adds that the relief applies to individual items, ie as they would normally be sold to an individual in a retail setting, eg, if a pallet of 100 bottles of shampoo is donated, each of those bottles would be an item for the purpose of the valuation threshold.
The public notice also expands on how to assess the value of the donated items, including acceptance of reasonable estimates when the original cost is difficult to assess, particularly where the donated goods are below the value limits.
There is no specific certificate required from the receiving charity, but it will be necessary to keep detailed records to support the zero rating.
Comment: This new VAT relief is primarily of interest to charities (particularly those involved in poverty relief or community activities) and the businesses that may wish to donate surplus goods to them, such as retailers, manufacturers and technology companies. We expect many businesses who have previously been deterred by the VAT consequences might now be open to considering the feasibility of donating their surplus goods.