DuelFuel products include a carbohydrate-based flapjack and a protein-rich cake slice packaged together and designed to be consumed before (flapjack) activity to provide energy and after (cake) activity to provide amino acids for muscle protein synthesis.
The slices are made using the same equipment and processes used to manufacture conventional flapjacks and cake slices but with reduced sugar and fat levels and added multi-vitamins and minerals, and milk protein concentrate and bovine collagen powders as replacement for standard flour.
Because of the these healthier ingredients, the brand's founder Tim Davies has been in a legal battle with HM Revenue and Customs since launching the range in January 2022, when he was informed his products would be classified as 'confectionery' and therefore subject to 20% VAT, as opposed to 'cakes' (which are VAT free as a staple food).
"The consequences were devastating on our business, to the point I had to cease DuelFuel trading in the summer of 2022," Davies told NutraIngredients, adding that he was confident the decision was incorrect as he had sought professional advice from two VAT specialists during the development of DuelFuel to ensure products adhered to HMRC’s guidance on cakes.
Having exhausted all avenues to appeal HMRC’s decision directly, Davies filed an appeal with the First Tier Tax Chamber (“FTT”) in April 2022.
The Tribunal’s ruling
The Tribunal heard DuelFuel’s appeal in September 2023 and released its ruling just this month, affirming that the products will be classed as confectionery.
The ruling was made based on the conclusion that DuelFuel’s cakes contain ingredients healthier than “butter, flour, sugar & eggs”; contain a vitamins and minerals blend, unlike conventional cakes; are designed to be consumed “on the go” by active adults; and consumers of conventional cakes do not associate cakes with being healthy.
"Our view—that of our VAT advisor, our barrister and me—is that the Tribunal has erred," Davies said. "We are currently reviewing the Tribunal’s ruling in detail and considering appealing its decision to the Upper Tribunal Tax and Chancery Chamber.
"We believe the Tribunal has erred because of the overwhelming consumer research evidence that shows consumers of all food products—including cake—now seek healthier alternatives."
Davies said there has been plenty of market research to show consumers want and expect added nutritional benefits and healthier baked goods and cakes.
"A simple ‘acid-test’ of the consumer research is to run a Google search for ‘cakes with protein’, ‘cakes with collagen’, ‘cakes with protein and no sugar, butter and eggs’ or any iteration thereof," he added. "The results are staggering—at more than 200 million hits."
He argued this clear online trend is proof the Tribunal’s determinations that "the archetypal cake would be considered by the ordinary person to be a relatively high calorie food" (par 121 in the ruling) and "the use of the protein powders instead of conventional flour to be different from what an ordinary person might think of as the ingredients of a cake" (par 123 in the ruling) are incorrect.
Implications for the functional foods and supplements
HMRC sets policy and Tax Tribunals make rulings in consideration of precedents set by prior decisions. Thus, the Tribunal’s ruling on DuelFuel’s cakes has the potential to impact the functional foods, supplements and wellness food industries, Davies warned.
"Any food product with protein used as a replacement for less healthy alternatives could be deemed to be appealing to sports enthusiasts, and not mainstream consumers—and therefore taxed accordingly," he said. "Although ‘sports nutrition’ is not a statutory term in the VAT Act 1994, HMRC apply tax to foods that appeal to active adults for their nutritional benefit."
He argued that popular functional foods, such as muffins and cookies with added protein, vitamins and minerals may become subject to VAT, despite the fact that HMRC’s guidance states the inclusion of vitamins and minerals to an otherwise normal food product does not change the usual VAT liability of the product as a whole.
"The potential implications for all players in the functional foods space are considerable; the DuelFuel Tribunal decision could embolden HMRC to reclassify food with functional benefit and subject it to VAT," he said.
He warned that the judge’s comment "we do not find (DuelFuel’s) variation from a conventional flapjack recipe to be material. Both the conventional and the current flapjack are very different from the conventional cake" now gives HMRC licence to categorise flapjacks as confectionery.
He added this is a concern for ingredient suppliers too, including protein producers, who will also suffer if VAT is applied at retail to the food products which include their ingredients.
"To render healthier foods more expensive (through the application of VAT) than their conventional counterparts would be completely counterintuitive, not least because of the growth of obesity amongst adults in lower socio-economic groups," he said.