A guide to VAT on food for your business

For business owners running any type of VAT-registered food enterprise, such as a retail outlet, food producer, food manufacturer, wholesaler, restaurant or café owner, bar or takeaway, understanding Value Added Tax (VAT) on food or drink can be a minefield.

VAT treatment on food and drink products can vary depending on whether the product is hot or cold and how it is consumed. Some items will be zero-rated, while others will be subject to the standard rate.

Whether you are just starting a business and pricing food and drink items for the first time or you’re adding products to your menu, you need to understand what you charge VAT on and pay VAT on. This article provides a comprehensive guide for VAT on food in the UK.

Is there VAT on food and drink?

Generally, VAT is applied to the sale of food and drink, but there are two different VAT rates. VAT will be charged either at the standard VAT rate of 20% or the zero-rate of VAT.

However, if your business is not VAT registered (i.e. it has not or will not reach the VAT turnover threshold of £90,000 in the current tax year), these rules will not apply to your business.

It’s worth noting that it can be advantageous for a business to register for VAT, even when turnover is below the VAT threshold of £90,000. This then allows you to recover VAT on business purchases. Speak to an accountant, such as dns Accountants, about becoming VAT registered.

Factors that determine VAT rates on food and drink

Three main factors determine the type of food and drink that will come under VAT rules. These are as follows:

• Food classification (pure or manufactured food).
• Whether the food is hot or cold when sold for takeaway consumption
• Whether the food is eaten on premises or taken away to be consumed elsewhere.

VAT rates on food and drink in the UK

Below is a summary of the VAT rates in the UK on food and drink, depending on the type of product and how it’s sold:

The above is a simple indication. However, VAT treatment is far more complex with many subtle differences, particularly around takeaway items.

The food and drink industry covers a huge array of goods sold through a wide variety of channels and that is what makes VAT on food and drink complex than many other areas.

The UK government website contains general guidance on VAT and this can be useful initially to understand the basics of how VAT on food could impact your business. The guidance is as follows:

• Any food and drink for human consumption (that is not supplied for catering) is generally zero-rated.
• Items that will be standard rated (20% VAT rate) include:
  • Hot food
  • Hot takeaways
  • Catering
  • Alcoholic drinks
  • Savoury snacks (i.e. crisps).
  • Sports drinks and mineral water
  • Ice cream
• Any food or drink served in restaurants, food courts or cafes and consumed on the business premises (regardless of whether it is hot or cold).
• Takeaways and restaurants providing hot takeaways must charge standard rate VAT on all hot takeaways and home deliveries.
• Cold takeaway food does not have VAT charged on it, unless it’s eaten in the takeaway premises.

Hot food

Any hot food that is either consumed on the premises or is served hot for takeaway must be charged at the standard rate of VAT.

Cold items

Cold items consumed on the business premises will be standard-rated. However, cold takeaway food is more complex. Most cold takeaway food will be zero-rated for VAT, but there is a list of “excepted items” such as confectionery, sweetened baked goods and crisps that will be standard-rated.

Standard-rated item examples

Examples of standard-rated items are listed below:

Zero-rated item examples

NOTE: Some items, such as pastries and sausage rolls, can be sweetened, iced, or chocolate-covered. In these cases, they may be classified as confectionery and be standard rated. Check HMRC’s exceptions list if unsure.

Intricacies of VAT rates on food products

The above may make you think that VAT on food and drink is simple. However, there are many anomalies, meaning that seeking professional advice from qualified advisors is essential to get it right.

Anomalies in VAT on food include:

Tortilla chips are zero-rated - crisps are standard-rated.

Smoked salmon is zero-rated - smoked cod is standard-rated.

A biscuit may be zero-rated – a biscuit covered in chocolate is standard-rated.

Hot takeaway food

If food is offered hot at the point of sale and for hot consumption, it will be standard-rated.

HMRC criteria stipulate it will be classified as hot takeaway food if:

• It has been heated for the customer to be consumed hot.
• It has been heated to order.
• It is kept hot after being cooked or heated.
• It is supplied in packaging designed to retain heat.
• It is marketed or advertised as hot.

Bakery products

Bakery products are a particularly complex area of VAT. In 2012, the UK government tried to clarify and tighten the rules around hot takeaway food in a debate dubbed the ‘pasty tax’. This case focused on ‘intention’ rather than just ‘sale’. Meaning it’s not whether the food is actually hot, but if it’s being marketed and sold as hot food or presented in packaging designed to retain heat.

If you sell an item that has just come out of the oven and you are allowing it to cool naturally and not attempting to retain the heat or market it as hot, then it will be standard-rated.

Many bakery items like bread, cakes and plain biscuits that are sold cold are zero-rated for VAT. However, if these items are sold hot or are sweetened, iced, or chocolate-covered, they then become standard-rated.

Are all drinks subject to VAT?

The majority of drinks are subject to standard-rated VAT. However, one exception is milk that is classed as a basic grocery item and is therefore zero-rated.

Hot drinks

Hot drinks like coffee, tea and hot chocolate will always be charged at standard VAT rates, whether taken away or consumed on the business premises.

Cold drinks

Most cold drinks are standard rated. This includes bottled water, milkshakes, cold/iced coffee, soft drinks, fizzy drinks and smoothies. However, plain milk (and some flavoured milk) is zero-rated if sold as a basic grocery item.

All alcoholic beverages are subject to standard-rate VAT.

Catering services

If your business provides food and drinks for functions such as weddings, parties and corporate events, everything will be treated as a catering service and therefore standard-rated at 20%.

Even if the food supplied would otherwise be zero-rated, the fact that you have prepared, presented or serviced the food will classify it as standard-rated.

Catering services include:

• Food in hotels, including breakfast and room service.
• Meals provided by employers to staff through catering companies.
• Food served on transport (including trains and planes).
• Cooking or food preparation for a customer in their home (for example, a hired chef for a dinner or party)

VAT for food producers

If your business is producing or processing food, the VAT rate will depend on the type of food processing involved. There is government guidance for food processing that covers categories and examples of different types of food production.

It’s important if you are considering setting up a food production company that you understand the different VAT rates and VAT treatment for the foodstuffs you are looking to produce or process. The addition of VAT could have a substantial effect on future profits.

Can I reclaim VAT on food and drink in my business expenses?

If you’re self-employed or run a Limited Company that is VAT registered, you may be able to reclaim VAT on food and drink as a business expense.

You can claim food and drink as subsistence (if VAT has been charged on the food originally) when you are travelling for business or working away from your usual business base.

To claim the VAT back on the food and drink, you will need a VAT receipt.

Alcohol is not normally reclaimable, even if consumed at a business event.

Client entertaining and alcohol (even if consumed at a business event) is not reclaimable.

Food purchased for staff on a business trip will be reclaimable.

How dns accountants can help

Applying the correct VAT rate when supplying food and drink can be very complex, depending on the type of food business you are in.

Speak to a VAT professional at dns who understands the complexity of VAT on food and drink.

Whether you need help registering for VAT, completing VAT returns, making a VAT reclaim or just explaining the VAT rates to apply, dns accountants can help.

Contact dns on 03330603321 or email us at [email protected].

About the author

Gary Zouvani
I am a qualified chartered management accountant with over 25 years’ experience working in industry and accountancy practise. Currently DNS group operations director I manage over 50 employees as well as head up our accountancy franchise proposition.