I've just picked up a new client in the food industry (catering and non catering). Looking through the previous accountants VAT returns a few things are evident. They always recover 100% of input VAT and make no annual adjustment for partial exemption. Since 78% of net sales are hot food (VAT charged) and 22% of sales is on cold food (no VAT charged). I would expect partial exemption rules to apply?
My understanding of the way partial exemption works is as follows: The value of standard rated supplies (say net £1,300) are separated from zero rated (say £200) the % value of net standard supplies over all supplies (in this case 86%) is used to recover the non-specific input VAT in the quarter. All standard related inputs are recovered in full, and all exempt related inputs are not recovered. Then once every 12 months (when? I'm not sure, but think its the 1st VAT quarter following the accounting year end) there is an annual recalculation of the partial recovery rate (so 86% in Q3 might become an annual rate of say 82%, and there will be more input VAT to repay back to HMRC). Is this right?
My client thinks he pays too much VAT with the old accountant. But once I hit him with partial exemption he'll recover less VAT and will have to repay the over recovery from previous months! The previous accountants are a reputable firm so I'm surprised they've not identified partial exemption, is there anything to suggest here that partial exemption rules do not apply? Turnover levels? % of zero rated supplies being de minimis? Thank you.
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VAT partial exemption
From what you describe your client is not partially exempt. Sales of certain foods are zero rated so even though no VAT is charged on supply the vendor can still recover input tax. However check HMRC guidance or other refernce works on what food supplies are zero rated and what are not, it is not as simple as hot = standard rate, cold = zero rate. There are issues as to whether food is sold ready to eat or whether further preparation is required before consumption.
Agreed
Zero-rate is not the same as exempt. All supplies of hot and cold food are taxable supplies - some at standard-rate and some at zero-rate. As they are taxable supplies, they are not exempt supplies and partial exemption simply cannot be an issue.
Thank you both.
Generally, zero rated for cold food is fine by me. Makes the VAT calculation much easier and means all input VAT can be recovered. As you rightly say these are not exempt supplies so no partial exemption issues to consider, only standard and zero rated supplies. Ta.
Will read through VAT notice 709/1 for the detail on specifically which products are zero rated, in the context of catering and supply.
An area where I have seen partial exemption outside banking has been where a VAT registered sole trader also has a rental property which incurs costs such as those of an agent and pays VAT on the input. The above are correct. Similar situation with cloths shops selling childrens' clothing or cycle shops selling helmets.
Premises
You should remember that cold food sold for consumption on the premises is a standard rated supply. Food that is hot simply because it is freshly cooked and is intended to be eaten hot or cold e.g. pies, is zero rated if consumed off the premises. For what constitutes premises you shoukld look at the Compass Catering/BBC case.