VAT on Food and Its Future
VAT is value-added tax consumers pay on the products and services which are fit for human consumption. It is an indirect tax that the government uses to generate revenue within their set policies and standards. The government of the UK has established a series of elaborative rules for VAT on food. However, these rules are complex to understand and get confusing when applied to various scenarios.
Our retail accountants and specialist business advisers who work within the food industry have curated this easy to follow guide simplifying the essential information you need for VAT on food, either as a producer or as a consumer.
How does VAT on Food Work?
Regardless of your industry position as a food supplier, a wholesaler, or a retailer, you need to have enough knowledge about the working of VAT within the food industry to be able to avoid complications.
The charge of VAT of food depends on the type of food that is being supplied. The amount differs based on the type of food item, its serving style and the medium it’s being provided through.
Is There a Legal Obligation to Register for VAT?
Businesses are not legally obliged to register for VAT until their annual taxable turnover exceeds the VAT threshold. A VAT registered business can set off the VAT paid to suppliers, with the VAT charged to its customers, the net result is paid to or collected from HMRC.
At the same time, businesses not registered for VAT do not need to charge output tax or claim input VAT. However, a firm may voluntarily register themselves for VAT even if their annual taxable turnover lies beneath the threshold.
What if a Business Registers Voluntarily?
A business can volunteer to register for VAT before reaching the threshold. The same obligations as a compulsory VAT registered business will apply to a voluntarily registered business. A business will benefit from registering for VAT as now it will be eligible to reclaim the input tax on purchases. However, the firm will still be liable to collect the output tax which is paid by the customers and submit it to HMRC.
Types of Food Items in The Food Industry defined for VAT
- Takeaway food
- Non-alcoholic and alcoholic beverages
- Drinks which are not beverages
- Bakery products
- Frozen products
- General savoury snacks
- Animal feed
- Raw meat and fish
- Vegetables and fruits
- Cereals, nuts, and pulses
- Culinary herbs
- Home Cooking and Baking food
Different VAT Rates on Food Items
In most cases, people consider that food is always VAT-free, but that is not the case. Certain food items are free from VAT by being zero-rated or exempt, but some food supplies include VAT. Supplies which are fit for human consumption can be charged different VAT rates depending on the laws set up by the UK government. These include:
- The zero rate – 0%
- The standard rate – 20%
- The reduced rate – 5%
These rates apply to processed, restaurant served, and all food items in the food industry.
Food Items Liable to VAT
Hot food served at restaurants, pubs, cafes or any other assigned sitting area is liable to the standard rate.
Dine-in or takeaway, if the food sold is hotly served by a restaurant, then a standard rate of VAT applies. Thus, if a customer order specifies hot takeaway food, it is promised to be served hot and packaged in a way to keep it hot; the standard rate will apply.
Non-alcoholic and alcoholic beverages
A standard rate applies to most of the beverages, including both non-alcoholic and alcoholic beverages. VAT is applied to all alcoholic drinks regardless of whether they are consumed on-premises or off.
Standard VAT rates are charged to some bakery items while others are zero-rated. The bakery items which are VAT liable include hot meals in a bun or pita, cakes provided through catering along with other minor bakery supplies that are discussed under confectionery.
A standard rate pertains to all frozen items that are bound to be consumed frozen. These include ice creams, ice lollies, frozen yoghurts, ice cream cakes, sorbets, wafer cones for ice cream, and powders for making frozen foodstuffs.
Some confectionary items are liable to the standard rate of VAT, which includes- chocolates, bars containing nuts, toffee, fruit or any other similar inherently sweet product such as cereal bars and specific fruits. You can find a detailed list confirming VAT rates for a variety of confectionery items in section 3.6 here.
General savoury snacks
Savoury snack products tend to fall under three specific categories to be liable to the standard VAT rate. These include snacks made through swelling cereals, potato, or any similar product as well as roasted and salted nuts. A standard rate is only charged to cereal and potato snacks when it is finally packaged and sealed. While on the other hand, the standard rate applies to roasted nuts, whether sold packed or loose.
Animal feeding products
Packaged pet food is the only type of pet food which applies to a standard rate.
Food and drinks supplied under a catering contract are standard rated.
You can read more details and specifics surrounding VAT for catering in section one of the HMRC VAT notice 709/1.
Food Items Which Are Zero Rated
Cold takeaway food items and drinks apply to a zero rate of VAT.
A list of non-alcoholic beverages applies to a zero VAT rate. The list includes some sports drinks, tea and tea-related products, milk, drinking chocolate, coffee and related products, extracts of milk, egg, meat and yeast.
Drinks which are not beverages
Zero-rated drinks which boost up your energy such as nutritious sports drinks, coconut milk, substitutive meal drinks, fresh fruit juice and plain soy milk.
Some bakery products are zero-rated and mainly include-all bread products and all types of cakes, excluding catering cakes.
All products which need to be cooked or thawed before eating such as- raw meat and fish are zero-rated.
While some confectionary items are liable to the standard rate, we also have a list of zero-rated items. These involve cakes, chocolate spreads, toffee apples and edible cake decorations.
General savoury snacks
Food snacks are liable to a zero VAT rate if the standards discussed above are not met.
Animal feeding products
A zero-rate applies to all animal feeding products except packaged pet food.
Foodstuffs which are suitable for human consumption, whether used directly or indirectly in the manufacturing process are zero-rated. These include necessary items such as fruits, vegetables, pulses, cereals, nuts, herbs, culinary, home cooking and baking ingredients.
Changes in Food VAT Over the Years
VAT was a replacement for purchase tax in 1973, which set the standard rate to 10%. Gradually over the span of nearly 40 years, we see how the standard rate has risen to 20%. This depicts the government measures to increase indirect taxation over direct. At present, VAT on food lies under three primary rates: standard, reduced and zero as discussed above.
Recently, the UK government has put into effect a massive cut in the VAT rate from a 20% to 5% standard rate-from 15 July 2020 to 31 March 2021, for the hospitality and tourism industry; leading to cheaper holiday accommodation. This measure has mainly come into effect due to the pandemic caused by the coronavirus. The aim behind this measure is to assist businesses during such crucial times to avoid shutdowns.
The VAT Cut in 2020
The reduced VAT rate of 5% on food and drinks has been set for six months starting from July 2020. It mainly applies to food and non-alcoholic beverages consumed on-premises along with hot takeaways. Premises could include restaurants, pubs, cafes, or any designated areas for specifically eating, such as food courts.
A vital factor to consider is how the VAT cut in the UK does not apply to alcoholic drinks. This cut does not affect the zero-rated food products and mainly considers reducing the VAT for the standardized products.
Pass on Tax to Consumers: Mandatory or Optional?
The tax cut represents that firms may cut prices for consumers. However, there is no obligation to pass it on. The government has stated that businesses are free to pass it on to consumers or reap the benefits for their companies, as it is entirely optional. Firms will use the demand approach to ensure that the overall economy benefits from their decisions. Suppose a price cut in a specific food item brings higher revenue, from an economic perspective, that is what the firm will follow as businesses look forward to maximizing profits.
Considering how companies have been severely affected due to the lockdown, it is up to the firms to decide the prices. Many established food businesses in the industry have declared price cuts, but this does not imply that each item will undergo a reduction.
The benefit of the VAT Cut to Producers and Consumers
The government has estimated that households can make savings with this price reduction, only if the firms pass on this reduction. While some firms are looking to pass the VAT cuts to consumers, many others look to using it to improve their financial position. The government has made this temporary relaxation to support business functionality.
Producers can use the VAT cuts for goods which are relatively priced sensitive to improve revenues. This way, the overall revenues would improve the business. Alternatively, firms may not pass it on and improve their internal financial losses which have been caused due to the pandemic.
Consumers, on the other hand, have increased expenditure in some cases while savings in the other. A customer will be willing to pay less for the same restaurant meal or a drink at the pub. Therefore, this VAT cut has initiated an increase in human consumption. Moreover, as food consumption takes approximately 10% of a household’s income, a fall in the total expenditure will eventually lead to more household savings.
As a result, the VAT cut can positively impact both the producer and consumer interests.
Overall Impact of The Cut on The UK Economy
We see how a VAT cut stimulated economic growth in the UK from December 2008 to 2009 when the UK economy needed a boost. Such a temporary VAT cut has been brought into action again this time due to lockdown measures, causing a massive economic dip. This measure stimulates consumers spending behaviour as post-tax prices fall. As a result, consumer purchases will be affected in two ways.
Firstly, considering the income effect. A reduction in food prices will lead to making the consumers wealthier as less money will be spent on more goods. This effect would, in return, lead to an increase in wealth accumulation along with an increase in buying behaviour, stimulating the economic activity of the country.
Secondly, coming to the substitution effect. According to this measure, we observe how consumers have a higher incentive to spend more as they would prefer to take advantage of this cut. This consumer behaviour would lead to a short-term increase in the demand for goods with reduced VAT applied.
Eventually, these two measures will influence the boost in economic activity during the temporary period of the VAT cut. Such an influence will lead to more working opportunities in the production sector, thus improving employment and earnings for the workers. This cycle depicts the domino effect of demand on jobs and an increase in wages, again reaching a rise in spending pattern.
The Future Prospects of VAT on Food
According to the announcements made previously, the UK has formally left the EU. At the same time, the government will still apply the VAT rules until the transitional period ends. The expected date for the period to end is January 1st, 2021; the new period might open with newer rules and regulations. Keep an eye on our blog for the latest developments.
Keeping in mind the recent costly tax cuts due to the pandemic, we must be ready for stricter policies by the government to recoup these losses. These policies could include applying VAT on zero-rated items as this matter was neglected previously due to the requirements from the EU. However, once we leave the EU, there could be a wide variety of amendments to the VAT types, rates or rules. This could lead to complexities in how VAT is charged in various industries or on various items, including food.
For example, a zero rate is charged on a sugar-laden cake while not on a water bottle you buy from the supermarket. This example depicts a problem which requires rectification. Consequently, criticism rose against the previous Chancellor for bringing in a world of complexities for VAT on food by introducing a ‘pasty tax’.
A seeming factor to consider is that VAT may see a vast number of changes compared to the previous years. As the UK government is now free to choose the VAT policies without much external influence. Therefore, it is your responsibility to follow potential changes within the industry. You can subscribe to our blog to keep updated with the latest developments related to Accounting, Tax and Business related matters. Alternatively, if you are not sure about how VAT works for your business speak to our expert VAT Accounting team for a bespoke plan of action.
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants, and has over 10 years of experience in practice and across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. It was this dexterity that led him to be Enterprise Nation’s Top 50 Advisors.
Jibran is fueled by his passion for helping businesses. He unequivocally believes that as business advisors and accountants for our clients, it is our responsibility to work with them as business partners. As specialists, it is our duty to help our clients navigate through the complexities of constant change and the implications that come with it.
Over the past decade, innovative disruptions have changed the way businesses work, everything from cloud software, innovative business models, to AI and machine learning, have impacted how businesses operate, grow, and expand.
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