The well-known and long running VAT distinction between what is a cake (zero rated) and what is confectionery (standard rated) has taken another twist with a recent First Tier Tribunal decision concluding that products with the characteristics of ‘snowballs’ have sufficient features of cakes to be zero rated.

Revenue and Customs Brief 36/14 has now been published setting out HMRC’s changed position following the decision of the First Tier Tribunal and explaining this change of VAT treatment. The brief is aimed at businesses that manufacture and/or sell this type of product known as ‘snowballs’ that are the same as those manufactured by Lees of Scotland and Thomas Tunnock Ltd. Such businesses may now be able to claim a refund of VAT though HMRC state any claims made will be subject to the unjust enrichment rules and the 4 year cap as normal.

The case involved two taxpayers who challenged a previous ruling that ‘snowballs’ were standard rated confectionery by claiming they were also cakes. Both submitted voluntary disclosures for VAT they claimed was overcharged. HMRC disagreed with this view and so the matter was decided by the First Tier Tribunal.

The Tribunal considered what factors should be considered when identifying whether a product is a cake. They used a number of factors derived from the authorities that fell to be weighted in the balance, namely:

• ingredients
• process and manufacture
• unpackaged appearance
• taste and texture
• circumstances of consumption
• packaging
• marketing
• self life
• name/description
• ‘how it behaves’ after it is removed from packaging

In keeping with previous classification exercises, the Tribunal acknowledged that there are no objective tests that can be imposed to determine whether a particular item of confectionery is or is not a cake, and that each case must turn on its own particular facts.

The Tribunal did not dispute that these snowball products are confectionery. However, after considering all of the above factors they accepted that whilst these snowballs do not have all of the characteristics of a cake they decided that they do have sufficient characteristics of a cake for them to be characterised as a cake. This means that they can be zero rated for VAT purposes.

HMRC consider that the borderline between confectionery and cake causes few problems, but with the ever changing selection of confectionery available there will always be some products whose status as cakes is not necessarily self-evident. These snowballs are an example of this type of product. The Tribunal has made its decision based upon the particular facts before them and HMRC have accepted that decision and will be updating their guidance in respect of this type of snowball in due course.

In this case a ‘snowball’ was found to be a dome of marshmallow coated in any combination of the following:

• chocolate
• sugar strands
• carob
• cocoa
• coconut

which may or may not include a jam filling. Of course, products which are also called ‘snowballs’ but not the same as those in this case may not be zero-rated.

As a result of this Tribunal decision HMRC is changing its policy on the VAT classification of this type of snowball confectionery. Guidance and Public Notice 701/14 Food will be updated shortly to reflect these changes in VAT treatment.