Flapjacks crumble under HMRC pressure

One of the more hotly debated areas of VAT can be the treatment of certain food items. Even if the matter has been formally decided in court, many may still dispute whether a Jaffa Cake is a cake or a biscuit. For those still unaware, it was determined to be a cake which is important for VAT purposes as cakes are zero rated, whilst chocolate covered biscuits are subject to VAT at the standard rate. 

The position can be even more complicated for flapjacks. HMRC views traditional flapjacks as similar to cakes, and zero rated. However, flapjack bars have previously been found to represent ‘confectionery’ for VAT purposes, as highlighted in this previous weekly tax brief story. 

In the case of Duelfuel Nutrition Limited vs HMRC, the company’s products which consisted of a flapjack and either a cake bar or brownie were scrutinised to determine whether they should be treated as zero rated for VAT purposes.

The founder and owner of Duelfuel Nutrition Limited (‘Duelfuel’), as a regular gym goer, identified a gap in the market in ‘selling a product to those carrying out vigorous exercise which provided both carbohydrates before exercise for energy and protein afterwards to help rebuild muscle’.

Having undertaken market research and carefully developed the product, a twin-pack was marketed with a flapjack to be eaten prior to undertaking strenuous exercise and cake to be eaten afterwards. The VAT status of the products was key as it was considered that the price point was such that they could not be sold if VAT at 20% was added on top. Once an adverse decision letter was received by HMRC on the product’s VAT status, the company temporarily ceased trading pending the appeal.

In determining the status of the company’s goods, cakes literally took the stand in court with a plate of various cakes entered into evidence. These served as a comparison, allowing for a taste test of Duelfuel’s goods against others such as McVitie’s chocolate HobNobs, Mr Kipling’s chocolate slices and Kellogg’s Nutri-Grain bars.

A number of different factors were considered in the court reaching the decision, such as the ingredients, size, packaging and marketing of Duelfuel’s products. On tasting the products, the judge found they were ‘edible but, the even taking into account their being stale’, the cake, flapjack or brownie were not found to be of a ‘standard to be served to guests as a treat with afternoon tea’.

Ultimately, the goods were found to have the appearance of cakes but given ‘the ingredients, taste, packaging, marketing and pattern of consumption’, an ordinary person would not consider them to be a cake. Instead, the court found that they were ‘confectionery’ and Duelfuel was unsuccessful. The case shows how difficult it can be for food manufacturers and retailers to correctly determine a new product’s VAT status and it can potentially prove fatal to the survival of a business.