When is a flapjack not a flapjack? Unfortunately for Tim Davies, HMRC are pondering this very question in relation to his new DuelFuel products. And it could cost him his whole business.

What is HMRC’s issue with DuelFuel?

DuelFuel are a new range of flapjacks, brownies and cakes designed for before and after exercising. Tim Davies is the founder of the start-up and has his first batch of stock ready to sell. But he’s now embroiled in challenging HMRC’s surprising ruling that they’re classing his products as confectionery. This is despite his initial conversation with HMRC indicated that DuelFuel items are cakes.

Why is the definition as confectionery important?

The classification of items as cakes or confectionery is extremely important. It’s the difference between being 0% VAT-rated or 20% VAT-rated. Cakes, including brownies and flapjacks, are all considered to zero rated for VAT by HMRC. But confectionery is subject to 20% VAT.

Yes, just like the old Jaffa Cake argument. Which was won my McVities against HMRC in 1991.

In DuelFuel’s case, HMRC are saying that their flapjacks are, in fact, cereal bars – which fall into the confectionery category.

This is HMRC’s own list of things that are categorised as cakes for VAT purposes:

“The following products, described below, are all zero-rated as cakes:

  • flapjacks
  • chocolate crisp cakes (‘crunch’ cakes)
  • caramel shortcake
  • marshmallow teacakes
  • lebkuchen
  • traditional Japanese sweetmeats.

Asian sweetmeats are also zero-rated as cakes: see VFOOD9900.”

Believe it or not, there is a whole separate section devoted to flapjacks’ categorisation. The confusion surrounding flapjacks is a result of the invention of cereal bars. HMRC’s document says:

“It is our policy that there is a difference between flapjacks and cereal bars. This policy development arose because, at the inception of VAT, flapjacks were widely accepted as cakes, and cereal bars were not widely available, if at all.”

The new cereal bars are subject to VAT, so getting this distinction applied correctly to your product is crucial. HMRC’s policy also says that “standard flapjacks along with minor variations” are zero-rated. Their examples included adding chocolate chops, raisins or a topping of some kind.

HMRC defines a flapjack as being made “solely from oats”. Adding any other cereal to the recipe means that it “is no longer a traditional flapjack” and is reclassified as a cereal bar.

What effect will this ruling have on the DuelFuel company?

Such serious policy about the definition of cakes and confectionary may seem laughingly trivial. But to DuelFuel’s owner, Tim Davies, this is absolutely no laughing matter. The stakes are high and the consequences are serious – not just for him as founder. He said:

““The rule change means we have to include VAT which will put us out of business.

“I’ve got an 18 year-old employee from Caversham who I employed in a kickstarter programme, but I’d have to make him redundant.

“He’s doing a great job. He started three months ago and he’s really growing in himself. I would make him a full time job offer, but because of this we won’t be a viable business anymore.

“It feels as if HMRC are pulling the rug out from under our feet.

“HMRC have acknowledged we are using the exact ingredients used to make flapjacks and have confirmed our flapjacks look, taste and feel like flapjacks, so we cannot understand why they are saying they are not flapjacks.

“They are also saying our brownies and cakes are not brownies and cakes. The entire situation would be hilarious if it wasn’t so serious.”

Mr Davies has spent more money trying to give HMRC the evidence they need to categorise their products as cakes. He has paid for scientific research to be done into how DuelFuel products decay. This is to prove that they don’t go soft, like a biscuit, but actually harden like other cakes. This is one of the creative strategies that McVitie’s used to win their Jaffa Cakes case in 1991.

Understandably, he is getting to the end of his tether with this huge roadblock to launching DuelFuel, saying:

“Boris Johnson wants to make Britain a great place to start a business, but one of our instruments of government is undermining those efforts. I’m running out of energy and the business is running out of momentum – we just want HMRC to stick by their own guidance and then we’ll get on with scaling up our business and contributing a far greater amount to the national coffers in the future.”

What’s HMRC’s response to the DuelFuel case?

HMRC don’t comment on individual cases, but a spokesperson said:

“The VAT rules require a business to charge VAT at the standard rate of 20 per cent on the sale of an item of confectionery, unless it is a cake or a biscuit not covered in chocolate.

“For these purposes, confectionery includes any item of sweetened prepared food which is normally eaten with the fingers.

“A product is a cake or a biscuit if it has sufficient characteristics to be so categorised. HMRC accepts that a traditional flapjack can be treated as a cake and zero rated.

“However, a product that contains different ingredients and, for example, has been developed as a sports nutrition product falls to be confectionery and is standard rated.”