the best iceing for a cake like that would be butter iceing (it wont melt and as a guide line wont meld into one colour) iceing suger and un-stalted butter... just cream them together from a recipe i've just found (i think its my one from tafe...)
~you'll need~
140g butter softend (unstalted)
280g Iceing sugar (can be the 'blend one' if no one has any glutin issues)
1 tbs milk (optional...)
~methord/maddness~
1. Beat the butter in a large bowl until soft.(dont over do it...) Add half the icing sugar and beat until smooth. (its a very light yellow...)
2. Then add the remaining icing sugar with one tablespoon of the milk. (depending on how thick/thin you want it)
3. add any food colouring you'd like

My tip for making the iceing "smooth" on the cake is smother it with the bace colour (blue?) and use the non-bumpy end of a butter knife and smooth it off (it'll be a little thick...but it 'looks' good) and put it in the fridge to let the butter 'set' (so about 10-15mins..) and then get a copy of the stars/union jack and trace it with a sqwer (sp?) and then use a zip lock bag (or something like it) and fill with the colour for what your doing (eg. stars..white) and cut a corner off it and use it as a pipeing bag, then just fill in the stars.

HTH...PM me if you need any more help...im not good at making the cakes but i have books on it some place here i can scribe out for you