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Markel Tax

26 May 2020

VAT to take away?

Covid-19 could have a far-reaching effect on the UK economy. Some sectors will have been affected more than others. The food and hospitality sector (restaurants, bars, cafes, canteens and similar establishments) appears to have been hit particularly hard. Businesses are having to adapt quickly to survive, for example, by offering to deliver food. In doing so, businesses should take advantage of VAT rules allowing the VAT charge to be reduced on qualifying supplies, while ensuring no unintended consequences or VAT traps might be lurking. In this article we discuss where such savings and pitfalls might occur for businesses in the food and hospitality sector. We start with a brief look at the basic VAT rules in this area and go on to consider where opportunities might arise.

The basics

The VAT law in respect of food is not a picture of clarity. The general position is that the supply of food is relieved of VAT by ‘zero-rating’ i.e. a 0% rate of VAT is applicable. However, there are a number of exceptions to the zero-rating for food, for which the standard rate of VAT will apply. What exactly falls into the relief, therefore, has been the subject of much debate. There has been a steady flow of cases in the courts over the years in respect of the zero-rating relief for food items.

The first main exception to the zero-rating are for food items that are, as a rule of thumb, considered to be ‘luxury goods’ i.e. non-essential food items such as confectionary, crisps and fizzy drinks etc. Even then there are, famously, exceptions such as cakes and certain biscuits which are zero-rated. The complexity is evident in the legislation itself: Part (b), Group 1, Schedule 8, VAT Act 1994 zero-rates “The supply of anything comprised in the general items set out below except … (b) a supply of anything comprised in any of the excepted items set out below, unless it is also comprised in any of the items overriding the exceptions set out below which relates to that excepted item”.

The second main area that falls outside this zero-rating is ‘catering’, which has the further variables associated with it around whether the catering is on or off the premises, i.e. takeaway or eating in, and whether the food is hot. Traditionally restaurants and the like will have standard-rated their supplies under this exclusion from the zero-rating, but how many of their supplies qualify for zero-rating now they are being delivered?

End of eating in for now?

Understandably, eat in sales have ceased for restaurants, pubs and cafés that have had to remain closed during lockdown. Some have adapted their business models by increasing or offering new takeaway or food delivery services. This could give businesses an opportunity to reduce their VAT charges on certain sales, or alternatively cause a VAT issue if the business is not familiar with the complex VAT rules outlined above when determining whether each supply is standard-rated or zero-rated and how the rules in respect of delivery charges apply.

Takeaways and the catering exception

In HMRC’s view, “catering in its ordinary meaning includes the supply of prepared food and drink. It is characterised by a supply involving a significant element of service.” Supplies in restaurants, pubs, cafés, canteens and so on will be standard-rated, but what about takeaways? Can all takeaways be zero-rated?

The rules are complex. There is, for example, an important “exception to the exception” for supplies of hot takeaway food. Delivery of cooked ready-to-eat meals will often be standard-rated, but certain foods, such as sushi, will not be a cooked meal. Some foods may not be cold, but they are not hot either, for example, wraps. Baked products are a further example of products that could cause difficulties in determining the applicable rate of VAT, where they are hot when put out for delivery or takeaway, but could still be zero-rated depending upon a range of other factors.

Delivery

Local delivery is itself a standard-rated service. A business supplying food will often charge for delivery separately, but in many circumstances delivery will no longer be standard-rated.

When determining the applicable rate of VAT, businesses should consider the relationship between the delivery charge and the main supply of the takeaway, particularly whether the delivery is “ancillary” to the main supply. Where the main supply can be wholly zero-rated, an ancillary delivery charge could be zero-rated. If there is a mix of zero-rated and standard-rated items, the way VAT is applied to an ancillary delivery charge would require careful consideration.

Food for thought

Despite these challenges and grey areas, businesses should not be deterred from offering takeaway and delivery services where it is commercial to do so. In fact they should be maximising the reduction in VAT charges on qualifying supplies and at the same time maximising profits and cash flow. A review of previous VAT returns might also be appropriate to ensure zero-rating has been accounted for and accounted for correctly.

Although businesses might look to adapt quickly to the changing nature of doing business in a post Covid-19 world, it would be wise to take advantage of the zero-rating as early as possible whilst ensuring systems are established correctly to avoid any costly mistakes in VAT returns that might be difficult to put right later.

If you need support or further information regarding VAT and food, please contact Kevin Hall or Punnit Vyas at Markel Tax on 0333 920 5708.

Tagged Value added tax (VAT) services Value added tax (VAT) services Value Added Tax (VAT) services COVID-19
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