The Government has announced that it is to reverse plans to impose VAT at 20% on food sold above ambient temparature and the definition of “hot food” has been altered to allow the change.
The Chancellor had in his March Budget speech controversially proposed that any food served above ambient temperature would be taxed at 20 %. The idea was to address an “anomaly” in the system. However this lead to a major outcry that the use of an ‘above ambient temperature’ test would lead to distortion between summer and winter temperatures and thus affect the VAT rate.
The new VAT rules remain complicated though. We understand that the Chancellor has written to the Chairman of the Treasury Select Committee that pasties and other bakery items will only have VAT charged on them if they are intended to be served hot and they will no longer attract VAT if they are “cooling down” after being removed from the oven. This will clearly place obligations upon the supplier to support the cooling down process.
This is clearly a victory for common sense. The proposals were ill conceived as they were unmanageable for the business community and the customer had no idea of when they would pay the additional tax. We await the revised rules to see if they appear workable so watch this space for further thoughts.
Furthermore the proposal to apply 20% VAT on holiday static caravans form 1 October 2012 will also be altered. They will now attract VAT at a reduced rate of 5% from next April. Static caravans do not currently attract any VAT whether for residential or holiday use.
Any government proposing a hike of 20% in tax on a commodity must expect a backlash as businesses do not have time to properly decide how to deal with the increase so, while any tax rise is tough, a 5% increase at least gives businesses some scope for either absorbing some or all of the increase or raising prices.
For further details, advice or comment on this issue, please contact John Crawford on 01962 735350
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.
Forgive the pun, but the VAT treatment of food items are a hot potato at the moment, and businesses selling food should use this opportunity to consider their own VAT treatment. However, businesses in this sector also need to be aware that HM Revenue & Customs (HMRC) is to launch a campaign later this summer targeting taxpayers who are breaking VAT rules. The department is currently seeking opinions on its plans for an initiative to crack down on individuals and businesses who are trading above the VAT threshold but who have not registered for VAT.
So what is the opportunity? Well, as I am sure you are aware, the UK has a zero rate for the supply of certain foods, and those that do not qualify for the zero rate are, by default, subject to VAT at the standard rate.
Having said that VAT is a European Tax and therefore European cases can be of interest in the UK. One recent ECJ case concerned the supply of a cooked sausage as a take-away item (much in the same way as hot-dogs and burgers in the UK) which was considered not to be in the course of a supply of catering, as there was a very limited ‘service’ associated with the supply. The customer essentially wanted, and received, a cooked food item with little preparatory services attached, which the Court considered should be subject to the reduced rate in Germany; thus falling short of a catered supply, which would be subject to the standard rate in Germany.
Additionally, there has been a UK case where delivered food was considered to be a mixed supply of goods. Some items which are delivered hot, so that they could be consumed hot were ruled as subject to VAT at the standard rate; other items delivered hot only due to them being freshly prepared, but not otherwise delivered so that they could be consumed whilst still hot were ruled as zero-rated. Therefore a hot take away or delivered meal, intended to be consumed hot, will be subject to VAT, whereas associated accompaniments, such as naan breads, salads, spring rolls etc. would not be subject to VAT.
Businesses should use this opportunity to check that VAT is not being applied to take away foods which can qualify for the zero rate, such as: -
- Cold sandwiches
- Biscuits (as long as they are not covered in chocolate)
- Frozen meals
Essentially the more you do to food in preparing it for consumption, the more likely that VAT will be due.
All very well if you are VAT registered. If not, on our second point, make sure that you monitor carefully your turnover to ensure that you register for VAT at the correct time. The current registration limit is £73,000 and previous limits can be found on HMRC’s website. Failing to register can result in a backdated registration with VAT being due on historic takings as well as a penalty being levied by HMRC.
If you would like more advice on any of these issues, then get in touch with Karen Mulcahy, firstname.lastname@example.org or call on 01962 735350.
The decision has created the opportunity to explore whether the zero rating for food has been properly implemented in the UK, and specifically whether it is appropriate to have excluded hot take-away food from the zero rate – resulting in a standard rated supply. There is still much speculation regarding the outcome and many businesses will choose not to pursue a claim. For businesses that are considering the benefits of making a claim, they should now be considering how to prepare that claim.
The VAT Consultancy is well placed to provide support for those that want to explore the opportunity further. In this respect we have teamed up with a VAT Technical Adviser who will work with us to develop the technical basis and advise on the legal process.
Businesses should, in any case, be aware that it is only possible to make a claim for the past four years, which means that any delay in submitting a claim will reduce the overall claim.
If you would like further assistance or information then please contact me: email@example.com or 01962 735350.
The case revolves around the definitions applied to the supply of food as a good, as opposed to the supply of food as a catered service. The European Court considered that where the supply involved limited preparation, as for grilling a sausage or burger, to be taken away for consumption, the supply was that of a supply of goods, subject to the reduced rate of VAT in Germany. By comparison, a catered service would consist of a more involved service, such as the provision of tables and chairs, knives and forks etc., creating an environment for enjoyment of the food.
The UK has not adopted a reduced rate for food, and when the zero rate was introduced certain exceptions were drawn into the legislation, which mean that they are excepted from the zero rate and therefore subject to VAT at the standard rate. A supply in the course of catering is one such exception. However, this is further defined within the Notes as any supply for consumption on the premises on which it is supplied, and any supply of hot food for consumption off those premises, i.e. hot takeaway food.
It is this line that HMRC is relying on in to deny the application of the European Court decision in the UK – but this presumes that the UK legislation is compatible with the direct effect of the EU legislation. This is part of the challenge creating the opportunity for UK businesses to protect their position in respect of the last four years. Of course, businesses can wait for the outcome of the legal debate, but this will not happen overnight and may restrict the ability for the business to recover the full extent of overpaid VAT available.
In short, this is HMRC’s polite way of saying ‘Bog-off’, and not for the first time. Some years ago a European decision in another German case determined that takings from certain gaming machines were exempt. The initial reaction from HMRC was that the decision had no effect in the UK, however, many of you will be aware of the recent significant repayment of overpaid VAT to the Rank Group in the UK – just the latest instalment in this long running debate.
To coin a well used gambling phrase, ‘you’ve got to be in it, to win it’. How true!
For more advice on this issue, get in touch with Karen Mulcahy firstname.lastname@example.org or call her on 01962 735350.
In the last week the ECJ has published its judgement in the joint cases of Manfred Bog, CinemaxX, Lohmeyer and Fleischerei. This judgement is already hitting the UK press as it raises interesting questions in connection with the distinction between catering services and the supply of foodstuffs i.e. have taxpayers been erroneously accounting for VAT on their sales of takeaway or mobile food sales. Before readers rush off to buy celebratory popcorn, it is necessary to consider that the case is in relation to German Taxpayers and whether German VAT legislation was being interpreted in line with EU legislation and it cannot be directly read in to UK VAT legislation.
In summary, under EU Law, Member States are able to introduce a reduced rate for ‘Foodstuffs’ and for ‘Restaurant and Catering services’. The German government applies the reduced rate to ‘Foodstuffs’ but beverages and all restaurant and catering services are treated as being subject to the standard rate. In the UK we joined the EU with a derogation to retain a zero rate for certain foodstuffs and not having adopted the reduced rate for restaurant or catering services everything falling outside of our zero rate is naturally liable to VAT at 20%.The ECJ case was primarily about whether the Taxpayers were supplying food services i.e. catering which would then be standard rated, or whether they were supplying foodstuffs which would fall within the German reduced rate. The ECJ judgement considers that ‘foodstuffs’ includes cooked and prepared food ready for immediate consumption but that such foodstuffs will only become restaurant or catering services when there is sufficient additional provision of other service elements (such as tables, chairs, cutlery and crockery and waitressing). It was held that the sale of hot food from Mr Manfred Bog’s market stall was not catering and, as such, he was correct in using the reduced rate for all but the beverages. Equally in the case of CinemaxX the simple provision of a chair in the auditorium with a drinks holder, was not enough to create a provision of catering services for the food sold at the cinema kiosks. This is obviously good news for burger and food vendors in Germany. In the UK (and notwithstanding current accepted definitions) the zero rate currently excludes confectionary and beverages, as well as catering. The UK has not adopted reduced rates for catering services, which means that anything not falling within the scope of the zero rate will be subject to VAT at the standard rate. In another food related case (‘Deliverance’), the UK Second Tier Tribunal decision may offer further scope to UK businesses as this case hinges on the definition of ‘hot’ food. Whilst we are still within time for HMRC to lodge an appeal, the Deliverance case was successful in arguing that a motorbike service delivering ‘freshly baked’ (and therefore warm/hot) poppadoms, naan breads, onion bhajis and samosas could zero rate the supplies.
HMRC has not issued any comment on either the ECJ case or that of Deliverance yet and that this may not be forthcoming for several weeks. Both cases highlight the complexity of VAT legislation relating to food and takeaway sales and our recommendations are that all businesses involved in the sale of takeaway food, food outlets, catering services or mobile food services consider what it is they are supplying.
There has been a significant increase in the number of cases successfully challenging positions that, for example, harm fiscal neutrality. These cases provide an opportunity to consider the potential for claims relating to non-catered food. The VAT Consultancy is working with leading advisors to develop this opportunity. Businesses should be looking to protect their position in respect of VAT liabilities already declared and paid to HMRC. Get in touch by email: email@example.com or call us on 01962 735350
A recent Upper Tier Tribunal Case involved the delivery of crispy duck pancakes, spring rolls, samosas, falafels, sesame prawn toast, onion bhajis and bread of several kinds, where Mrs Justice Proudman reviewed the issue as to whether they were standard rated for VAT as hot takeaway food or zero rated as “freshly baked”.
The court looked at the way the company delivered the product which stated that all cooked items were put into a cardboard box which is put on a shelf with heating above while the complete order is assembled. Cold items were put in bags. The hot items of the completed order were put in the heated cupboard for a maximum of 15 minutes pending dispatch. The complete order including cold items were then put into a padded bag which goes into a lined box on the motorcycle for delivery. The reason for treating the disputed items in the same way as other hot food was to save having a separate system for dealing with them and to comply with food safety regulations.
Mrs Justice Proudman was quite clear in her decision that there is a clear distinction between a supply of food that is freshly-baked as against a supply of food that is consumed hot. Providing the food is freshly-bake, even though it maybe hot at the time of consumption, it would qualify for zero rating, and this did apply to the items at issue.
Clearly the decision is critical to all suppliers of freshly-baked products be they bakers, confectioners or caterers as to whether they inadvertently charge VAT on hot food that would actually qualify for zero rating.
If you would like further advice on this burning issue, contact us, firstname.lastname@example.org or call on 01962 735350.
- Time to curl up on the sofa in front a roaring log fire with a glass of mulled wine and watch a Christmas movie – but don’t rent them! As with presents, buy your films from one of the many VAT-free import online retailers and for the ultimate VAT-free munchie opt for microwave popcorn or Pringles.
- Businesses on the flat rate scheme should take the opportunity to review their position. Revised flat rate scheme rates will become effective at the time of the rise so take advice to establish if there is the chance to use a lower banding. This could have a considerable impact on cashflow.
- Christmas is a time when charities may be reliant on voluntary or seasonal staff – don’t overlook their training so that VAT free sales are recorded correctly.
- Christmas is a great time to catch up friends and family for dinner. When you’ve been slaving over a hot stove for a few days, it’s tempting to indulge in a takeaway, but be warned this will carry VAT. Better to cook something at home. Looks like it’s turkey curry after all then!
- Charities and VAT-exempt businesses, which are unable to recover VAT costs on purchases, will be hardest hit. Be aware that your budgets will stretch 2.5% less far in 2011 than they did this year. If you’re considering making a capital investment, you may wish to consider bringing the purchase forward to benefit from the 17.5% rate.
- If you are one of the larger charities and have a shop, encourage and sell donated goods, which are VAT free. Goods that are bought in for resale will be subject to VAT; but don’t forget that books and children’s clothing are VAT free!
The classification of food and drink items has become a “hot potato” in the VAT world again this week with news that Innocent Pure-Fruit Smoothies are being classified by HMRC as a luxury beverage and will therefore carry the standard rate of VAT. Not good news with the VAT rate rise in the New Year, further pinches on our purse strings won’t help us pinch those inches off our waistlines!
More recently Lucozade Sport Isotonic and Subway have also received unfavourable rulings in a long line of food firms who don’t feel they are quite the apple of HMRC’s eye.
We’ve had the great pringle debate – when is a crisp not a potato – and of course the famous Jaffa Cake – when is a cake a biscuit……..
So just what are the guidelines from HMRC when it comes to food and drink?
- no VAT is payable on most “essential” basic food and drink
- luxury items such as smoothies and ice cream will carry VAT
- anything classed as a beverage will also carry VAT, so fruit juices and fizzy drinks are subject to VAT, but coffee, tea and milk are zero-rated when bought in a super-market, but vatable when purchased as a prepared hot drink. Bottled water? – it’s a beverage and subject to VAT!
- doughnuts or cakes are zero rated, but the little old chocolate digestive is standard rated!
Feel like you’re wading through treacle? No-one said it was going to be a piece of cake!