The hazards of food sales

Morrisons have recently lost a massive case regarding VAT on date-based snack bars (specifically Nakd, but includes others). HMRC decided that they should have been charging VAT, but Morrisons had taken the decision that these items were zero rated and ended up more than £1million out of pocket.

So what?

VAT on food is complicated. Essentials like fruit, bread, milk are zero-rated, but then there was the famous Jaffa cake case a few years back when, after long (and expensive) deliberation it was decided that Jaffa cakes were CAKES and, therefore, zero-rated, and not a biscuit which would have had 20% VAT on them.

A potato is zero-rated: Crisps are confectionary and have VAT charged.

But it's not so simple that if you make something from a basic product, it becomes VAT-rated.

Restaurants and takeaways

If you're a local restaurant offering a takeaway service:

  • A cold sandwich to takeaway is zero-rated
  • The same sandwich, warm (e.g. toasted or microwaved), to takeaway has VAT charged
  • The sandwich - cold OR warm - eaten in-house also has VAT charged.

So if you visit one of the chains of coffee houses, such as Costa or Caffe Nero it will cost you 20% more to eat your coffee and muffin on the premises.

If you're a restaurant owner and have been providing a takeaway service during lockdown, you won't need to have changed VAT on cold food takeways, but as soon as your customer arrives at your premises and sits down to eat, their meal should have VAT added.

What happens if you're serving food outside?

This is when the water gets murkier. If your customer is on your premises, then VAT is due. If they're eating out on the pavement (as the first stages of lockdown being lifted insisted) then you could argue that they're not actually on your premises - but we suspect that the VAT-man will think otherwise!

The ball is in your court

It may not surprise you that many small independent cafes don't charge VAT to eat in - usually because they don't know the rules. And, to be honest, most independents won't get investigated.

BUT, if you're zero rating food and drinks that you should be standard rating - beware. If you should be investigated and HMRC decide that you've made £10K of sales that you should have charged VAT on, but haven't - that's £2K that you'll now have to pay. As you can hardly contact every customer and request the VAT payment, it's not possible to get that money back and so it will come out of your profits.

It is your responsibility as the business owner to get it right, so do be careful, there are still a lot of grey areas. And as new industries and products develop it's likely to get greyer. If in doubt check with a professional (i.e. an accountant), it could save you a lot of money and anxiety later on.