A temporary lower VAT rate currently applies to some supplies of food and drink but not others. While this is good news it has caused some confusion. What VAT should you be charging your customers? Our VAT expert John Craig provides the answers.
Temporary VAT rate
The government introduced the temporary 5% VAT rate for the supply of food and drink that would normally be subject to the 20% standard rate. The lower rate was originally intended to apply between 15 July 2020 and 12 January 2021 but in September the Chancellor announced it will be extended to 31 March 2021. Generally speaking, the lower rate applies to the supply of hot and cold food and non-alcoholic drinks consumed on the seller’s premises or in the course of catering.
Apart from alcohol, supplies made in the course of catering which are usually standard-rated are subject to the temporary 5% rate. HMRC says “catering” includes any supply of prepared food and drink with a “significant element of service”. Broadly, this covers food and drink consumed in restaurants and cafés whether served hot or cold. The temporary rate also applies to the supply of food at events such as wedding receptions. Delivery of cooked ready to eat food or meals, with or without crockery or cutlery, also counts as being in the course of catering.
However, the meaning of “consumed on the premises” can be tricky. It doesn’t necessarily mean within four walls. Seating areas outside can be included in your premises, and with social distancing measures that can be more common than usual.
The temporary 5% rate applies to hot takeaway food and hot non-alcoholic beverages sold for consumption off the premises.
You can zero rate cold takeaway food even if your main business is supplying food and drink in the course of catering, for example a restaurant which has expanded into takeaway. The zero rate also applies to takeaway food that requires significant further preparation by customers, such as thawing, cooking or reheating before consumption.
Some cold takeaway food and drink items, like crisps, bottled drinks and sweets, are standard-rated. If in doubt check HMRC’s food products list. If you deliver food or drink and add a delivery charge the charge is always standard-rated (20%) even if the food is zero rated.
Mixed supplies of food and drink can also be tricky. For example, HMRC considers a gin and tonic sold in pub or restaurant as a single alcoholic drink (a composite item) and so subject to 20% VAT. However, a tonic sold by itself is subject to 5% VAT. To save your customers VAT you might encourage them to order mixers as separate drinks. By comparison, a meal deal of, say, a sandwich and a beer offered as a single price is a mixed supply and so each element counts as a separate item for VAT purposes. VAT at 5% applies to the sandwich and 20% to beer.
Mixed supplies can be a problem if your tills or point of sale systems are set up to apportion the cost of mixed supplies. To get the VAT right you may need to reconfigure your till or, failing that, record orders manually and then input each item into your till separately.
Food and drink consumed on site is subject to the temporary 5% VAT rate, apart from alcoholic drinks which are still 20%. The lower rate also applies to takeaway hot food or drink unless it’s alcoholic and so subject to 20%. Alcoholic drinks with a mixer are subject to 20% VAT, but mixers sold separately are subject to 5% VAT.