It Really Takes the Biscuit – Flapjack is not a Cake for VAT Purposes
A recent First Tier Tribunal (“FTT”) has ruled that flapjacks cannot be classed as cakes for the purposes of UK Value Added Tax (VAT). This means that the supply/sale of such foods will be subject to VAT at the standard rate (currently 20% in 2022/23 tax year).
The case echoes similarities to the 1991 VAT tribunal case concerning Jaffa Cakes: United Biscuits (LON/91/0160), which found that Jaffa Cakes were in facts cakes (rather than biscuits) for VAT purposes, and therefore the supply of such items was zero rated for VAT (VAT at 0%).
VAT on Food
Generally the supply of food for VAT is zero rated, meaning suppliers are not required to charge VAT on such items. However there are several exceptions to this rule, where the supply of foodstuffs is standard rated. Examples include:
- Ice cream;
- Chocolate biscuits (but not cakes and not “non-chocolate” biscuits);
- Beverages (other than milk, tea, cocoa, and coffee); and
- Snacks which are made from potato (such as potato crisps).
The issues for businesses/suppliers who charge VAT on their goods are:
a) Depending on the nature of the foodstuff being sold, a supplier/seller may need to add up to 20% to their price, which might deter price sensitive customers.
b) It is the taxpayer’s responsibility to charge the correct rate of VAT on its supplies, and pay this to HMRC. Therefore, where it is determined that a taxpayer has charged less VAT than they should have on supplies, they may be required to pay unexpected liabilities to HMRC, which could have serious issues for the businesses cashflows/profits.
Background to the Case
The taxpayer in this case was a representative member of a VAT group which included Glanbia Performance Nutrition (UK) Limited (“GNUK”). GNUK manufactures a number of lines of sports and performance protein bars, shakes, and powders, which it sells to both consumers, and other businesses (to rebrand and sell on as their own products). GNUK’s products were sold to another company in it’s corporate group (Glanbia Nutritionals (Ireland) Limited), but not part of its VAT group. GNUK would then be supplied some of the products back to be sold to third parties.
HMRC carried out a visit at the taxpayers principal place of business, where it discovered that GNUK had applied zero rate VAT to the supplies of 36 varieties of food products described as flapjacks, on the basis that the products were cakes for VAT purposes (zero rated).
On review of samples of the products, HMRC determined that the products should be classed as confectionary, and therefore subject to VAT at the standard rate. The case was appealed to the FTT.
The taxpayer appealed on two grounds:
- That the products were correctly zero rated as ‘cakes’ within the legislation; and
- Alternatively, if the supplies were indeed standard rated, then they should be entitled to reclaim input VAT on the earlier supplies of the same good to them, from Glanbia Nutritionals (Ireland) Limited.
The FTT considered many aspects of the flapjacks, and noted several factors that indicated that the products were not cakes in nature, including:
- Cakes are typically made with flour and eggs, and are aerated in the baking process. The recipe for flapjacks was oats, butter, sugar and golden syrup.
- The ingredients of the flapjack were very different from cakes, and also contained a very high level of protein which was not traditionally seen in cake recipes.
- The flapjacks were not baked, but instead heated to 85 degrees which the FTT stated was “…not the typical method used for making a cake”.
- The texture of the flapjack was chewy and dense, and more like a fruit bar than a cake.
- The packaging did not refer to the product as a cake, but instead referenced ‘flapjack’ and ‘protein’ quite prominently.
The FTT found that the products were not ‘cakes’ for VAT purposes, and therefore that the standard rate of VAT should apply.
They also concluded that the taxpayer was not entitled to a credit for input tax on the purchase of the same products from Glanbia Nutritionals (Ireland) Limited.
The provision of certain goods and services may be exempt from VAT, zero rated (0% VAT), reduced rate (5% VAT), and standard rated (20% VAT). However depending on the nature of the goods/services being provided, the correct VAT rate may not always be clear. Getting it wrong could mean charging a high/uncompetitive price to customers, or could result in significant and unexpected VAT liabilities where a higher rate of VAT should have been charged.
If you require advice on charging VAT on your supplies, and claiming input VAT on expenditure, please contact a member of our team.