Flapjacks are ‘not cakes’ for VAT purposes
The court has ruled that flapjacks cannot be classed as cakes which means they are subject to standard rate VAT and due to this the company is not entitled to credit on input tax
The First Tier Tribunal (FTT) has ruled in HMRC’s favour, declaring that the flapjacks sold by Glanbia Performance Nutrition (UK) Limited do not fall within the definition of cake for the purposes of VAT and were in fact classified as confectionery and are subject to standard rate VAT rather than zero-rated.
This meant that the company was not entitled to credit for input tax on the supply of the products.
Glanbia Performance Nutrition is a manufacturer of nutritional sports and performance protein bars, shakes and powders. Its sales are business to business and it sells its products to companies which sell the products to their customers rebranded as their own products.
Glanbia also supplied the products to Glanbia Nutritionals (Ireland) Limited (GNIL), which again were supplied to third party customers.
Following a visit carried out by HMRC at Glanbia’s principal place of business in 2016, HMRC became aware that the company had applied a zero rate of VAT to sales by Glanbia of 36 varieties of food products described as flapjacks.
HMRC analysed samples of the products and in September 2018 issued the decision that under section 73 of the Value Added Tax Act (VATA) the products were classified as confectionery and should be standard rated and not zero rated within the meaning of number two in Group 1 of VATA.
The decision was upheld in a statutory review in December 2018 and then HMRC issue assessments to VAT for the periods December 2013 to July 2018. These have since been withdrawn.
Glanbia argued that in regard to output tax on the supplies by the company to a third party customer, if the supplies are standard rated then Glanbia Nutritionals (Ireland) Limited should also have standard rated earlier supplies to them and that they are entitled to a credit for the input tax that they paid.
In January 2019, Glanbia appealed HMRC’s decision on the classification to the First Tier Tribunal.
An issue at stake in this case is that ‘if it is discovered that a supply to a trader as mistakenly zero rated by the supplier when it should have been standard rated, it may be possible to recharacterise the original payment by the trader to the supplier as a VAT-inclusive payment’ which would entitle Glanbia for tax credits on input tax on the supply of the products.
The First Tier Tribunal analysed and tasted four of the 36 products to evaluate the ingredients and manufacturing technique, the texture, and the appearance. It also examined the function and typical circumstances of consumption, the marketing and markets, and the packaging and the name.
The Tribunal noted the ‘archetypal’ recipe for a cake consists of a batter that is made with flour and eggs, is aerated in the process of baking and is baked. It would also be classed as a ‘high calorific food’ as it may contain oils and fats such as butter and sugar. The recipe for a flapjack was also noted as being oats, butter, sugar, and golden syrup.
The Tribunal stated that most of the ingredients of the products were a blend of oats, with dried fruits and seeds, nuts, and flaxseed. It did contain some ingredients for a cake, such as flour, oils, and fats, however, not enough to classify it directly as a cake. It also found that the products contained a ‘very high level’ of protein which is not seen in traditional cake recipes.
The First Tier Tribunal added that the products were also not baked but were slightly heated to 85 degrees which is ‘not traditional baking’.
The tribunal ruled that the texture was also not one of a cake, describing the consistency as ‘chewy and dense’ and more like a fruit bar than a cake and that oats were ‘clearly obvious’ in regard to the texture.
The products were ruled as ‘not having the same function as cakes and are not typically consumed in the same kinds of circumstances’ as they were not ‘sweet’, stating that the product would not be brought out and consumed in celebratory circumstances.
Regarding packaging, the Tribunal stated that the product claimed that it contained ‘high protein for muscle growth and mass gains’ and that could ‘help build lean muscle’, and was clearly targeted at consumers in the sports nutrition category.
The packaging failed to use the word ‘cake’ on any of the products with the words protein and flapjack featuring heavily.
An ordinary person would not consider the products to be cake, and they should be classed as standard rate in terms of VAT. This decision means that Glanbia is not entitled to credit for input tax on the supply of the products. The appeal is dismissed.
Glanbia is able to appeal the decision, however no announcement has been made.