Vatman finally defeated by Snugglebundl after two-year battle

The row centred over whether the company's flagship product, the Snugglebundl (pictured left), was a blanket or babywear. Under British tax rules, consumers pay no VAT on "essential" products but must pay 20pc tax on "luxury" items.

Children's clothes are classified as essential products, subject to the zero-rate of VAT but blankets fall outside the scope of the zero-rate, so output tax must be charged at the standard rate.

In April 2013, Mr Edwards submitted a tax return for the business and was informed by the VAT office that the start-up business was required to pay VAT.

"We were shocked," said Mr Edwards. "A blanket is only used at nighttime and lays over the baby. A shawl wraps around and is worn during the day. Ours is even more like a garment because it has a hood and ties at the front."

Mr Edwards received conflicting advice from different HMRC departments: one adviser agreed that the product should be exempt from VAT. "I recorded the conversation, typed it up and sent it to the VAT Office but they wouldn't agree," he said.

Snugglebundl was forced to assume the VAT cost without raising prices because contracts had already been signed with distributors. "The price was already at the top end and we didn't want to raise it further," said Mr Edwards. "We stopped trying to grow the business because the £7,000 to £8,000 bills from the VAT Office every couple of months were having a massive impact."

Snugglebundl appealed against the initial VAT Office decision and lost, then went to Alternative Dispute Resolution and was unable to get the case heard because it was a matter of law, rather than a dispute. Finally, the case was taken to a tribunal.

"It was like a war of attrition," said Mr Edwards. "It's only because I have an interest in law and wanted justice that I kept pushing."

An HMRC spokesperson said: "HMRC always seeks to work with businesses to resolve VAT issues and provide long-term certainty. In this case, the tribunal ruled the product should be zero rated and we have repaid the VAT."

The Snugglebundl was invented by Dave Solomons 20 years ago after his wife gave birth by caesarean section and struggled to pick up their baby.

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It was easier to pick up the newborn using a blanket, so he created a shawl with handles, which supports the baby's head when it is lifted.

The Snugglebundl founders claim that the design can help post-birth recovery, and the product has been endorsed by a number of independent midwives. Mr Solomans approached Mr Edwards, a fellow inventor, whose wife Heidi was a nursery nurse for 25 years, to perfect the design and bring the Snugglebundl to market. All four founders are still in the business.

Turnover at the company is set to more than double now that the VAT legal battle has been resolved, rising from £120,000 to £250,000 this year.

"In the past two months, we've introduced new products and new packaging," said Mr Edwards. "We've also just got our trademarks in China and Canada. The birth rate in the UK is just 14.4pc so the biggest growth for us will be in exports.

"We've been waiting two years to get on with all this. I'm glad we can move forward now."

Snugglebundl is the latest in a series of companies that have fought for VAT exemption. In 2009, Innocent, the smoothie company, argued that its products were "liquefied fruit salads" not beverages, in an attempt to secure a VAT exemption. The company claimed it was unfair to charge VAT on 100pc fruit juice smoothies when a bowl of the raw ingredients would not be subject to VAT.

Mr Edwards has called on the Government to review the appeals process and appoint an arbitrator in cases such as these. "At no point were we able to sit down with the VAT office and have our questions answered," he claimed.

"That was the biggest obstacle to recolving the issue."

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