A backdated £11m tax bill has sent Natural Balance Foods tumbling into the red as the Trek and Nakd bar producer fell foul of HMRC VAT rules.
The business sank to a £6.6m pre-tax loss in 2024 – compared with a £3.2m profit in the prior year – after paying £10.9m to the exchequer related to a dispute with HMRC over the VAT treatment for some of its snack bar products, according to the latest set of accounts.
The loss comes despite a 6.2% rise in turnover to £57.5m and a 1.4 percentage point bump in gross margins to 27.9% as management kept a tight control over costs.
“During the year, HMRC issued assessment notices in respect of a retrospective assessment, covering a number of years, of the VAT treatment of certain items,” said Lewis Lant, finance director of Lotus Bakeries Natural Foods UK, which includes Natural Balance Foods.
While the assessment amount had been paid, Natural Balance is appealing the decision by HMRC, Lant added.
A spokesperson for Lotus Bakeries, which has owned Natural Balance since 2015, told The Grocer: “The outcome of this dispute is uncertain and the subject of an appeal with HMRC, with timing dependent on the outcome of this and similar cases between HMRC and other businesses.”
Natural Balance is now applying the standard 20% VAT rate to its products and does not expect any future liabilities.
It follows recent accounts for Mondelez-owned Grenade outlining a potential £7.6m VAT liability in an ongoing dispute with HMRC.
In VAT law, confectionery is normally standard rated but there is an exception for cakes, which are zero rated. Flapjacks have historically been classified as cakes by HMRC. However, HMRC views cereal bars and energy/sports nutrition bars, which were not widely sold when VAT was introduced to the UK in the 1970s, differently.
Guidance by HMRC said a product that contains different ingredients and had been developed as a sports nutrition product is confectionery and therefore standard rated.
To determine whether a product is a cake, HMRC rules weigh up how an “informed ordinary person” would view a range of factors, including its ingredients, texture and marketing.
A tax tribunal in 2022 ruled a range of flapjacks manufactured by Glanbia Milk were not cakes as they would not be eaten for afternoon tea and more commonly consumed on the go. The ruling also found the flapjacks were not baked and contained high amounts of protein.
The judgement said the ordinary person would not consider these flapjacks to be the typical texture of a cake and were therefore subject to VAT.
HMRC also lost a famous case in 1991 with McVities successfully arguing Jaffa Cakes were a cake and not a standard rated biscuit.
More recently, DuelFuel, a startup launched by Tim Davies in 2022, lost a long-running dispute with HMRC after taking its appeal all the way to the Supreme Court. The brand makes a two-sided product, putting together a flapjack and a brownie meant for pre- and post-exercise nutrition. When the brand launched, HMRC ruled it was not a flapjack or a cake and was subject to VAT.
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