You can’t have your cake and eat it when it comes to flapjacks, following a recent tax tribunal ruling.

Asda has lost an 18-month dispute with the taxman, which involves a former professional wrestler, tycoon Peter Jones, and the indirect tax levied on the oats, seeds and honey-based product.

The decision has far-reaching consequences for businesses grappling with the task of placing their products on the shelves of retail giants.

Beyond being just another “cake versus biscuit” VAT wrangle, the case could have implications for the broader spectrum of suppliers who may suffer because their clients may be less inclined to buy as many units of a product, if they cannot claim the VAT relief.

John Whiting tax policy chief at the CIoT said: “It’s a great illustration of how difficult and how dangerous this issue is. The supplier who starts out with a product thinking it is zero-rated only for it to be standard rated could see its business model and profitability altered.”

Bill Gill, head of VAT at Asda, said: “We are very disappointed because the product had been developed to get some high-energy healthy products into people that really needed it.”

The issue of whether products can be zero-rated for VAT purposes has always been fought tooth and nail by businesses and the taxman. There have been battles over smoothies, teacakes (M&S’ victory was worth £3.5m) Jaffa Cakes and now flapjacks have hit the courts.

Gill called for a level playing field to be established: “It’s difficult to see in some of the other products [that have gained VAT exemptions] how it is so different, but the judges were very fair nonetheless.”

The flapjacks case arose after former professional wrestler turned entrepreneur Chris Thompson developed Crohn’s disease, which saw him suffer rapid weight loss.
He devised the idea of high energy seed-stacked flapjacks and made a successful pitch to business tycoon Peter Jones in an Asda “Dragons’ Den”-style competition. This led to the flapjacks hitting the shelves of the supermarket giant but the taxman took issue with the product’s exemption from VAT, HMRC claiming it was “confectionary” not a “cake”.

Asda argued the product was to be a “Seed Stacked flapjack”, a traditional “oat flapjack ­ but with added seeds for health and digestive benefits”.

HMRC argued that “the difference between flapjacks and cereal bars has narrowed due to the development of cereal bars and their current proliferation on the market.”
Tax judges ruled the flapjack was a cereal bar, which led to the standard rating, but CioT’s policy chief also called for the kinks in law to be ironed out.

“36 years after the introduction of something that was supposed to simplify tax we’re still talking about the difference between a cake and a biscuit,” Whiting added.

IN OUR VIEW

In the wider scheme of things, the decision shows businesses and entrepreneurs face a climate of uncertainty because the rulings are arbitrary as every product has its own unique list of ingredients, which may or may not match the criteria needed to win an exemption.