Info zone – Questioning a VAT assessment

Jane Johnson owns a successful restaurant and take-away business in London. The eaterie is famed for its extensive wine list, and Johnson has recently expanded into contract catering for small events at the local school.

Johnson received a visit from a VAT inspector who, after examining the books and records, raised an assessment of £50,000 covering a period of three years. Several reasons were given:
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* Examination of the profit margin on the sales of wines and spirits revealed a lower profit than expected, and he assessed VAT on the estimated difference.
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* The inspector considered that the sale of take-away pies, bread and pizza was liable to VAT as it was hot food. Johnson had always treated it as zero-rated.
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* He also considered the supply of meals to staff was VAT-able at the standard rate. Johnson had also never accounted for these.
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* It was decided that a supply of standard-rated hot food sold in conjunction with a zero-rated item - for instance, a baked potato with separately packaged salad - constituted a composite single supply, which was standard-rated.
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* Tips, he decided, were the same as the service charge, and he informed Johnson that she had to pay VAT on this income.
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* Finally, the inspector decided that all of the income from Johnson's school contract catering was VAT-able.

Johnson was shocked by the size of her assessment. She decided to seek professional advice to see whether the £50,000 could be reduced.

What the expert advises

Mike Payne is the VAT partner with BDO Stoy Hayward in Southampton
On closer examination, this assessment could easily be disputed in certain areas.
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* The wine profit-margin was reduced because of breakages, sales at cost to staff, and other reasons. Taking these into account, the level of mark-up could be shown as acceptable and so the assessment could be proved to be incorrect.
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* A large proportion of what the inspector described as hot take-away food was pies, bread and pizza, freshly baked on the premises. It could be demonstrated that the purpose of selling the food hot was to show it was freshly baked, and not to enable it to be consumed hot. Zero-rating still applies to food in these circumstances.
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* Supplies of meals for employees and family members are deemed to be free supplies of catering, so since the supplies were free, there is no VAT liability.
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* Where mixed packages of standard- and zero-rated food were assessed, it should be submitted that they could split the value of the supplies between the standard-rated (baked potato) and zero-rated (salad), thus bringing in some element of zero-rating and reducing the assessment.
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* While service charges are deemed to be part and parcel of the standard-rated supply within the restaurant, tips are outside the scope of VAT and none should be paid.
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* The catering contract between Johnson and the school effectively means she is acting as agent on the school's behalf. Since the provision of education and supplies of goods closely related to it are exempt from VAT, Johnson shouldn't pay any. The only VAT chargeable relates to the managing agent's fee charged by Johnson to the school.

Using these disputes it is possible that Johnson could see the withdrawal of the assessment altogether. The simplest advice is to consult a specialist if unsure whether such an evaluation is correct.

Standard-rated items, such as this baked potato, should be assessed separately when served with accompanying zero-rated foods, such as a salad

Be aware

Where there are different rates of VAT, the demarcation line between what constitutes standard-rate and zero-rated supplies can be very confusing. It is important to establish the zero-rated ground rules in order the ensure VAT is accounted for correctly.

For instance, consider the cherry. If picked and eaten from the tree it is zero-rated, when it is drained to be used in drinks it becomes standard-rated. However, a glacé cherry reverts to zero-rating because it is used in baking.

Contacts

Mike Payne at BDO Stoy Hayward

Federation of Small Businesses
www.fsb.org.uk

HM Customs and Excise
www.hmce.gov.uk