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Charging VAT on food sales

18 March 2014

Over a year since the pasty tax was introduced, there remains uncertainty about charging extra for food consumed on the premises, says Sarah Gallie

THE PROBLEM

The changes to the VAT rules surrounding the supply of hot food and the definition of premises introduced in October 2012 created a media and political storm. Just over one year on from the introduction of the ‘pasty tax', how has it affected the restaurant sector?

THE LAW

From 1 October 2012, VAT at 20% must be charged on takeaway food if:

  • The food (or any part of it) is hot at the time it is provided to the customer (except certain bakery products); and
  • one or more of the following applies, including food that is:

i) heated to enable food to be eaten hot; or

ii) heated to order; or

iii) kept hot after heating; or

iv) served in heat-retentive packaging ; or

v) marketed as hot.

VAT at 20% must also be charged on food (even if not served hot) where it is consumed on the food retailer's premises. While food sold for consumption on the premises was historically subject to VAT, the new rules confirmed HM Revenue and Custom's position that the premises include any area set aside for consumption by the food retailer's customers, whether or not it is used by customers of other food retailers.

EXPERT ADVICE

Hot food

Prior to the VAT changes in October 2012, there were a significant number of disputes with HMRC regarding the extent to which VAT applied to food sales. These disputes and the resulting case law highlighted a number of anomalies where similar food products were taxed differently.

Prior to the change in law, the key test (to determine if VAT should be charged) was based on whether the food was above ambient temperature at the point of purchase, and whether the retailer intended the food to be eaten hot. The subjectivity involved in determining this latter test was one of the key areas of dispute with HMRC.

One of the government's stated aims in introducing the changes was to remove the inconsistencies prevalent in the sector. It has only been 14 months since the change of rules and too early to see new case law emerging.

The cases that are progressing through the court system, such as Sub One Limited [TC00747], concern the application of the ‘pre-2012' legislation.

While the current legislation still remains unpopular in many parts of the sector given its impact on margins, the legislation does remove many of the inconsistencies and ambiguities that existed previously. As such, the current level of disputes with HMRC appears far more limited than was previously the case.

Premises

Confirmation was also provided to food retailers that any areas specifically set aside for consumption of food would be liable to VAT. This includes areas with tables and chairs which are regularly cleaned, such as food courts.

This, however, excludes areas that anyone can use (not just those who have purchased the food), such as seating areas in airport lounges and benches in shopping centres. This clarification has also given retailers an opportunity

to consider and, if necessary, revisit the VAT treatment applied to the sale of food consumed in such areas.

Confusion can often occur where there is an area for the customers to use, such as a food court, but there are also public areas (such as benches) just outside the food court.

CHECKLIST

Consider the following:

  • VAT should be charged if food is sold hot, or any effort is made to retain its heat.
  • If VAT should be charged where cold food is sold for consumption in public areas.
  • Appropriate training should be provided to till staff when determining at the point of sale whether food will be consumed on or off the premises.
  • A review of the VAT on products and the tills/systems is recommended to ensure compliance with the new rules.

BEWARE!

We expect these VAT rules will be interpreted strictly. HMRC has become active in recent months to ensure VAT is being correctly charged. A failure to do so could lead to an assessment for under-declared VAT together with potential penalties. It is therefore important to confirm the VAT treatment of all products sold to ensure it is charged if required.

CONTACTS

Sarah Gallie is a senior manager at Deloitte

sgallie@deloitte.co.uk

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