The VAT Implications of food are not straightforward to say the least. Whilst the food and hospitality industries are like all other businesses in that they must become VAT registered once their annual turnover reaches £85,000, the specifics of whether food sales are VATable and at what rate can be a minefield.
For your food business, it is important to consider these implications in order to make sure that you are fully compliant with HMRC and are not subject to any associated penalties or fines.
Factors which can affect VAT rates include whether sales are hot or cold, their chocolate content and whether they are eaten in or taken away. Whilst there is a myriad of different rules follow our guide to make sure you don’t fall foul.
The Jaffa Cake Quandary
Cakes and biscuits all count towards VATable turnover and are generally zero-rated. This means that whilst VAT does not have to be added to these sales, related revenues are included as counting towards the registration threshold.
Whilst most cakes tend to be zero-rated, certain types of biscuits are counted as standard-rated VAT (20%) if they have had certain modifications made to them. This includes biscuits wholly or partly covered in chocolate.
Additionally, sweetened and prepared food, other than cakes and non-chocolate biscuits, normally eaten with fingers are also standard rated.
There has been some fierce debate about the classification of certain products, with the status of Jaffa Cakes being particularly contentious.
This led to a landmark VAT tribunal in 1991, with HMRC claiming that the product should be a standard rated product due to it being a biscuit covered in chocolate. The court ruling worked out in favour of Mcvities, with Jaffa Cakes being considered as a cake and thus being able to continue to be recognised as attracting a zero rate of VAT.
Don’t Get Burnt!
Food or drink items which are sold hot at the point of sale for immediate consumption are classified as standard rated. This is applicable whether they are consumed on the premises or taken away.
Somewhat unsurprisingly, the interpretation of what is classified as hot is not always clear-cut. In the 2012 Budget, the Government famously came unstuck when then they tried to simplify treatment to be inclusive of items which are hot baked goods, served above ambient temperature. This meant that pasties and sausage rolls, which are baked but tend to be consumed cold (or below room temperature) as take away foods, temporarily became standard rated.
This was widely contested in the media and Parliament and was dubbed “the pasty tax.” This resulted in a subsequent uturn by the Government with these goods going back to being zero-rated.
Eat In Or Take Away?
Cold food and drink items sold by restaurants and vendors which is consumed on the premises in a designated seating area, with tables and chairs, are standard-rated.
These same cold items of food and drink which are instead taken away to be enjoyed off-site are zero-rated.
Hot food and drink are standard-rated irrespective of whether it is consumed on site or elsewhere.
A simple example which illustrates these variables is the purchase of sushi, which is traditionally served cold due to predominantly consisting of raw fish. If this is taken away it will be zero-rated due to being served below room temperature.
However, if the cold sushi is consumed in a separate seated area of the restaurant it will be standard rated and will attract the full 20% rate.
Assistance with your VAT – We can help
As experienced tax advisors and small business accountants, we can provide you with invaluable advice on the more complicated issues, such a VAT Implications within the food industry.