The changes announced to the VAT treatment of certain food items in last week’s Budget confirm that HMRC are now seeking to extend standard rating to food provided in the course of catering to the customer. This is in two situations:
- where food is sold at above ambient air temperature; and,
- where food is sold to be consumed in areas set aside for this, whether the seating/eating areas are provided solely by the producer of that food or if shared with customers of other food suppliers.
The reason for these proposed changes is stated to be due to a number of mainly successful challenges by businesses which would otherwise have to charge VAT on their sales of “hot takeaway food” or on food consumed outside their premises.
In particular, bakeries and supermarket outlets have been able to zero-rate their sales of products such as hot pies, hot meat products, toasted sandwiches, etc. This was primarily due to interpretation of the current VAT legislation, where food had been heated “for the purposes of enabling it to be consumed at a temperature above the ambient air temperature”. Many businesses successfully argued that the prime purpose of the heating was not for the food to be consumed at a particular temperature, but rather to comply with health and safety regulations and/or for appearance enhancement purposes.
Certain detrimental socio-economic effects are likely to be seen as a result of this change. These include:
- The imposition of VAT on certain basic foodstuffs at a time when retail prices are rising faster than average incomes.
- Increasing pressure on food producers by retailers who cannot pass on the (full) 20% increase to their customers and will be looking for considerable price reductions from their suppliers. This may cause businesses to fold as they will no longer be able to make a sufficient margin to survive.
- Encouraging businesses to keep the “ambient air temperature” of their outlets higher so that the temperature of “freshly baked food” is the same as or less than this.
The question arises as to how will HMRC define “freshly baked” bread? Would this include products requiring “bake off” by the retailer, as happens in many supermarket outlets currently, and flatbreads and similar staple bread items baked or otherwise created from a heating process pre-sale?
The definition of “premises” has also been clarified by HMRC. Currently, food (hot or cold) consumed on the premises on which it has been supplied is treated as being supplied in the course of catering and thus standard rated. However, the new definition includes food consumed in “any area set aside for the consumption of food by that supplier’s customers”, even if other suppliers’ customers can also use the area. This will cover food courts, tables and chairs outside restaurants and cafes, areas set aside for eating in airports, ports, railway stations, motorway service stations, theme parks, shopping centres, etc.
- Would there again be a differential VAT treatment where there are public seating areas, e.g. wooden benches for the purpose of seating- rather than for the consumption of food – located closer to the retail outlet than any area designated for eating?
- How can the staff at such outlets easily identify where the customer will go to consume the items purchased, and thus the correct VAT treatment, once the customers have left the premises? It might be nearer (and cheaper!) for customers to return to their place of work to consume the food, e.g. an office located next to a sandwich shop, rather than to sit in a “general” eating area which may be some distance further.
- Will the term “premises” include the whole of an airport or theme park?
- Will HMRC introduce a “distance test” to determine how far a consumer must take their food purchases to have them treated outside the confines of “supplied in the course of catering”?
We await the outcome of the consultation process on this with interest. In the meantime, if you would like to discuss this further, please contact Marianne Hawksworth on 01962 735350.