The Great Marshmallow VAT Debate: What Hospital Food Providers Need to Know
Liaison Financial’s Head of Tax, Kenny Lee, has long been using marshmallows to explain VAT in our annual VAT Conferences, and now they’ve again made the news as the Court of Appeal has issued a new ruling concerning their VAT status. Here, Kenny looks at the ruling, and what it means for food and catering providers across NHS settings…
14 April 2026
If you needed proof that UK VAT rules can get wonderfully, bafflingly complex, look no further than the decade-long legal battle over mega marshmallows – and what it quietly signals for anyone selling food in a healthcare setting.
The long-running question of whether jumbo marshmallows are zero-rated or standard-rated for VAT has returned to the First Tier Tribunal, after the Court of Appeal ruled that a key issue – whether they are normally eaten with the fingers – remains unresolved.
The case centres on Innovative Bites Limited, which sells oversized marshmallows marketed for roasting and making s’mores. HMRC assessed the company for VAT totalling around £470,000, arguing the product was confectionery because it is “an item of sweetened prepared food which is normally eaten with the fingers”. The company argued back that the packaging holds the marshmallows out as primarily intended to be roasted, with specific instructions for doing so included.
The courts have gone back and forth for years. The current position is that tiny marshmallows are zero-rated as ingredients, average-sized ones are standard-rated as confectionery, and mega marshmallows have been held to be zero-rated on the basis that they require further preparation before eating.
Why does this matter in healthcare?
For those supplying or managing food in hospitals, the same labyrinthine VAT logic applies… and the stakes are just as real.
NHS hospitals are themselves outside the scope of VAT, but food and drink items supplied in the course of catering within those settings are standard-rated. That means a hospital café, a canteen serving hot meals to staff, or a catering contractor providing patient food could face very different VAT obligations depending on exactly what is being sold, how it’s prepared, and who it’s being served to.
The key dividing line is whether food is supplied “in the course of catering” – defined as involving a significant element of service – which always attracts standard-rate VAT, regardless of whether the underlying food item would otherwise be zero-rated. A packet of biscuits sold from a hospital shop? Potentially zero-rated. The same biscuits served on a plate in a patient canteen? A different story entirely.
As the marshmallow case illustrates, how something is intended to be eaten, and the context in which it’s consumed, can fundamentally change its VAT treatment. For healthcare caterers and NHS procurement teams, that’s not an academic point. Misclassification across a large contract can quickly add up to significant sums.
At Liaison Financial, we work with healthcare organisations to get the detail right, before HMRC comes asking questions. If you’d like to talk through your VAT position on catering contracts or anything else in the healthcare space, we’re here to help.