Understanding VAT on Food – key Cases and Insights

The indirect tax treatment of food has long been one of the most complex and contentious areas of UK indirect tax. Although most food for human consumption is zero‑rated, the numerous exceptions within VAT legislation mean that relatively small product differences can have significant VAT consequences.

Over the years, HMRC and the courts have wrestled with where the boundaries lie, leading to a steady stream of Tribunal and appellate decisions. Recent cases have not simplified the rules, but they have clarified how those rules are to be applied, with a clear shift towards a strict statutory interpretation.

This article sets out the current framework for VAT on food, highlights key case law, and explains what recent decisions mean in practice for businesses.  We also consider some of the other indirect tax challenges for businesses in the food and drink industry.

The VAT statutory framework: zero‑rating with exceptions

Under Schedule 8, Group 1 of the VAT Act 1994, food of a kind used for human consumption is generally zero‑rated. However, this zero‑rating is subject to a long list of exclusions, including:

• Confectionery
• Hot takeaway food
• Ice cream and similar products
• Alcoholic beverages
• Soft drinks and preparations for making drinks
• Savoury snacks such as crisps and roasted nuts

Where a product falls within one of these exceptions, VAT is charged at the standard rate, unless a specific override applies.

Much of the litigation in this area arises because the legislation relies on descriptive wording rather than precise definitions, leaving room for disagreement over how particular products should be categorised.

Confectionery: strictly applying the statutory test

The definition of confectionery has been particularly controversial. While chocolates, sweets and certain biscuits are clearly caught, the legislation also extends to:

“any item of sweetened prepared food which is normally eaten with the fingers”.

Recent case law has confirmed that this wording must be applied as written, rather than through a broad assessment of marketing, branding or consumer perception.

Mega Marshmallows: narrowing the focus

The long‑running dispute over giant marshmallows illustrates this approach. Earlier Tribunal decisions placed significant weight on how the product was packaged, marketed and displayed. However, the Court of Appeal confirmed that these factors are secondary; the primary question is whether the product meets the statutory description.

When the matter returned to the Tribunal, the focus was squarely on how consumers normally eat the product in practice. Evidence showed that giant marshmallows are more commonly roasted on skewers or used as an ingredient, rather than eaten with the fingers straight from the packet. On that basis, they were held not to be confectionery, and, therefore, remained zero‑rated.

Evidence of actual consumer behaviour now matters more than brand positioning, but only insofar as it helps answer the specific statutory test.

Biscuits and chocolate: physical composition matters

Disputes around biscuits have also continued, particularly where chocolate‑like elements are involved. Cakes and biscuits are specifically excluded from the confectionery exception other than “biscuits wholly or partly covered with chocolate or some product similar in taste and appearance”.

In recent cases, the courts have adopted a highly literal, physical analysis of products. For example, where a biscuit contains chocolate internally or as a decorative element that does not form part of its outer surface, this may be insufficient for it to be treated as “wholly or partly covered” in chocolate.

This reinforces the principle that VAT classification can turn on product design and manufacturing details, rather than overall impression.

Hot takeaway food: HMRC’s position strengthened

The hot takeaway food exclusion has become another major battleground, particularly for supermarkets and food‑to‑go operators.

Recent Tribunal decisions have confirmed that the test is objective. The question is whether the food is hot at the point of supply, not whether it is marketed as hot, sold from heated displays, or intended to be eaten immediately.

In cases involving rotisserie chickens, the Tribunal accepted HMRC’s argument that heat retention caused by packaging was sufficient to bring the product within the hot food exclusion, even where the food was sold from unheated shelves.

Arguments based on legitimate expectation or historic HMRC acceptance have generally failed.

Temperature, cooling characteristics and packaging are now critical risk factors for food retailers.

Beverages and sports drinks: substance over branding

Not all recent developments have favoured HMRC. In cases involving powdered drinks, the Tribunal has declined to treat products as standard‑rated sports drinks simply because they are consumed as drinks or associated with fitness.

Instead, a two‑stage approach has been adopted:

1. Is the product objectively a sports drink?
2. If so, is it marketed as enhancing performance, recovery or bulk?

Where products failed to meet the first stage, they remained zero‑rated regardless of branding or intended audience. This confirms that marketing alone is not enough where the underlying product does not fall within the statutory category.

Flapjacks: HMRC narrowing the definition

At the inception of VAT, traditional flapjacks were widely accepted as cakes of common perception. This was not because of any specific reasoning behind such factors as their recipe, ingredients, or the manufacturing process. HMRC accepts that traditional flapjacks can be zero-rated.

HMRC now define flapjacks narrowly and view a traditional flapjack as consisting of oats, butter and syrup along with a few minor variations such as dried fruit, chocolate chips and chocolate or yogurt toppings.

The 2024 case of Duelfuel Nutrition Limited v HMRC highlights the ongoing friction between the VAT legislation and the rapidly evolving food landscape.

Simply looking like a flapjack isn’t enough; HMRC looks at the ingredients, marketing, and how the product is consumed.

Practical implications for businesses

Recent case law highlights several important points for food producers, retailers and hospitality businesses:

• The statutory wording of VAT legislation is decisive. Courts are increasingly reluctant to adopt broad “multi‑factorial” tests.
• Evidence matters. How products are manufactured, packaged and consumed can be crucial.
• HMRC is taking a more assertive approach, including encouraging retrospective disclosures going back up to four years.
• Products that sit near the boundary between zero‑rating and standard‑rating carry genuine financial and penalty risks.

Other Indirect Taxes

In addition to VAT, food and drink businesses may also have to navigate other indirect tax issues.

1. Soft Drinks Industry Levy (Sugar Tax)

Introduced in 2018, this is an excise duty specifically targeting added sugar in drinks. It is separate from, and often applied in addition to, VAT.

It is charged to manufactures and importers based on the sugar content of the drink and has a lower and higher rate dependent on the amount of sugar per 100ml.

2. Recent Changes

Starting from 1 January 2028, the threshold will drop to 4.5g per 100ml, and milk-based drinks (including milk shakes and lattes), which were previously exempt, will be included.

Businesses producing and/or selling sweetened drinks may wish to review the sugar content of their products and consider how they will be affected.

3. Customs Duty

For food imported directly into Great Britain (England, Scotland, Wales) from outside the UK, standard UK customs duty applies under the UK’s own tariff regime. Northern Ireland businesses benefit from access to both the UK market and tariff-free access to EU member states under Article 5 of the Protocol.

Customs duty is normally calculated based on the customs value of the goods with the rate of duty being dependent upon the tariff classification applied to the goods. However, for foodstuffs, the position can be more complex, with duties being calculated on:

• Ad valorem duty;
• Specific duty (weight or quantity based)
• Compound duty (combination of ad valorem and specific duty)

Food classification is notoriously complex, with small changes in sugar or milk fat contents resulting in significant changes in the duties due.

4. Excise

Excise goods come under greater HMRC scrutiny particularly where excise goods are held in a duty suspended state.  Businesses must conduct due diligence and regular risk assessments on suppliers and customers to prevent involvement in VAT or excise duty fraud. Failure to maintain a clear audit trail and verify partner legitimacy can lead to HMRC seizing goods, holding the business liable for unpaid taxes, or withdrawing registration.

HOW AAB CAN HELP

VAT on food remains a complex and evolving area, particularly for businesses developing innovative or non‑traditional products. While recent decisions have brought greater clarity to the legal framework, they also underline how narrow the margins can be between zero‑rating and standard‑rating.

Businesses should not assume that historic VAT treatment will continue to be accepted by HMRC, and regular VAT reviews remain essential where product ranges, manufacturing processes or supply models change.

These cases demonstrate just how challenging it can be for businesses in the food and drink sector to navigate the VAT rules with confidence. Determining the correct VAT liability is rarely straightforward, particularly where legislation relies on subjective tests and continually developing case law.

Our VAT specialists have extensive experience advising food producers, retailers and hospitality businesses on managing VAT risk, reviewing product classifications, supporting disclosures, and engaging with HMRC where positions are challenged.

If you have any queries about the VAT liabilities your business may be facing, or would like support reviewing your current VAT treatment, please do not hesitate to get in touch with Gabrielle Bird, Alistair Duncan or your usual AAB contact.