The VAT on food industry can be quite taxing (pun intended) to get your head around.
An instance which demonstrated the complexity of VAT is the Nesquik case. Nesquik is required to pay VAT on strawberry and banana flavoured powder but not on chocolate flavoured powder. This is because the chocolate flavoured powder contains cocoa meaning it is exempt, but the fruit flavoured powders are standard-rated. So how is VAT on food categorised?
Items you trade can fall into one of three categories:
Products or services which are exempt from VAT for example certain food (cake), insurance services, transport and education. This means you never have to charge VAT regardless of your turnover. However, you can also never reclaim VAT on business expenses including purchases.
Items such as books, children’s clothing and footwear and cold takeaway foods are zero-rated. This means the supplier does not have to pay VAT whilst claiming back all VAT paid out. Hence it would be recommended to register for VAT no matter your turnover.
The third classification for goods and services is standard-rated which means as a supplier you must charge 20% VAT on all your items as soon as you are VAT registered. However, you only need to register for VAT if your turnover exceeds the current threshold of £85000. Although as with zero-rated goods you can claim back any and all VAT paid out in the course of business, it is suggested you do not register for VAT until you reach the threshold.
Should I register for VAT?
When determining if you should or are required to register for VAT, there are three conditions to consider. Is the food you’re serving zero or standard rated? Are you planning on serving it hot or cold? And lastly, do you intend to provide an eat-in service as opposed to take-away?
If you have registered for VAT (due to having a turnover over £85000 or voluntarily) and are serving standard-rated items, you must pay 20% VAT. Although zero-rated items mean you pay 0% VAT, you may still be subject to VAT if you serve it hot or provide an eat-in service.
Food or drinks served hot attract VAT regardless of the VAT rating. In addition, if customers choose to use an eat-in service provided, you are required to charge VAT irrespective of the VAT rating and whether it’s served hot or cold.
Therefore, restaurants must charge VAT on everything served except items served cold and taken away.
If you satisfy either of the three conditions you are liable to charge for VAT:
- Standard rated goods (as opposed to exempt to zero-rated).
- Items served hot (as opposed to cold).
- Items eaten in (as opposed to taken away).
At Kala Atkinson we are trusted by all types of restaurants and cafes to prepare and file VAT returns. Get in touch today to find out how we can help you.