VAT and the catering business
A complex set of rules determine when VAT is payable in the catering industry. Some of the key areas to look out for are:
Tips
These are payments made by customers over and above the charge for the supply of meals, etc. If they are genuinely freely given, they are outside the scope of the tax and they are not considered for VAT purposes. This is the case even if a customer expressly asks for a tip to be shown on the bill to support an expenses claim, or where payment is made by credit card or cheque and the amount shown includes the tip. See article on service charges and tips.
Service Charges
Compulsory restaurant service charges are considered by Customs & Excise to be part of the cost of supplying a meal, so they are subject to VAT. This applies even if the service charge is passed on in full as bonuses to the staff.
Optional service charges were at one time treated as part of the cost of supplying a meal and were standard-rated. However, since May 1982, if customers have a genuine option as to whether to pay the service charge or not, no VAT is chargeable, even if the amount appears on the bill.
Therefore, when menus state that service charges are optional or at the discretion of customers, the charges are not taxable. See article on service charges and tips.
VAT and take-away food
VAT must be charged on all items supplied for consumption on the premises, and for hot food and drink supplied for consumption off the premises.
The supply of most cold take-away food is zero-rated. Exceptions are specifically listed in the law and include confectionery, alcohol, soft drinks and ice cream.
Hot food means food served above room temperature, or in the case of food supplied from open-air stalls or kiosks, above the surrounding air temperature.
If the hot food is supplied with a cold ingredient, as a single item, the whole supply is standard-rated. Examples include hot dogs, hamburgers, and baked potatoes with a cold filling.
Freshly baked products are also standard-rated if supplied to be eaten while they are still hot.
But if food is sold while it is still warm because it happens to be freshly baked, and not because it is meant to be eaten while still hot, it is zero-rated.
Cold take-away sales can be zero-rated provided they are sold for the customer to take away from the counter or point of sale and away from any larger premises in which a restaurant, stall or kiosk may be situated, and are not sold for consumption at tables or kiosks nearby.
If in doubt, contact Customs & Excise for a written ruling.
Catering for employees or family
Where employees are provided with free food or drink, no VAT is chargeable.
Where employees pay for their food or drink, either in cash or by deduction from wages, VAT is charged at the standard rate.
Where a VAT-registered owner of a restaurant, café or other catering establishment provides meals for himself or his family, VAT need not be accounted for. However, if any standard-rated items are taken out of business stock for his own or family use, VAT must be accounted for on the full cost of the goods.
Catering for customers and friends
If free meals or drink are provided for customers or friends, these supplies are regarded as business entertainment and any input tax incurred in providing the meal or drink is non-deductible.
Where meals or drinks are given in exchange for an identifiable benefit to the business, eg coach drivers or group organisers being provided with a meal in return for bringing a party to the establishment, any VAT incurred can be deducted but output tax must also be declared. The output tax is calculated on the cost of the goods purchased or on the cost of producing the goods.
by Dave Sweeting
Dave Sweeting is head of the VAT department at accounting firm Wilson Braithwaite Scholey.
