During the 11 years experience I assisted and managed the Accounts for many take away businesses in London and surrounding areas around. I also played a prominent role in handling VAT Investigations on various occasions.
We all know that one of the main problems of the Take Away Industry is the VAT on sales. For this reason, on 25 September 2013, more that 15,000 catering businesses in the UK protested, asking to the Government to reduce their VAT rate by 5%.
The Government answered as follow : "We do not accept the industry's case for a VAT rate cut for restaurants and catering," (Treasury spokesperson)
It is very easy to reach the VAT compulsory registration threshold as a take away business and many small business owners have the following question: "From the moment I'm VAT Registered means I have to increase the prices by 20% or I will lose 20% of the sales if I consider sales vat inclusive?"
The answer is: It 'DEPENDS' on the following 3 variables:
1. Is the food itself considered at zero or standard rated ?
2. Is it hot or cold ?
3. eat in or take away ?
After dealing with many VAT situations and investigations and after countless years of applying the Notice 701/14 Food i can give you a few examples to make help you understand the concept and to combine the 3 variables mentioned above:
Many of us use to buy take away wraps and buritors and you probably now have the following question "did i pay the right price or was I charged more"?
Based on Notice 701/14 Food, if you eat seated in the shop or as a take away outside of the shop, the wrap will be sold with 20% vat rate because variable 2 applies which says that hot food is sold at 20% rate.
Sushi and other uncooked meat is raw food, so in principle it's 0% VAT.
Therefore if you take it away you will be charged 0% vat in your bill, but if you sit and eat it in the shop the variable 3 automatically kicks in, which says that any food consumed at the place where it's been served, wherever if is cold or hot will have to have the standard vat rate.
3. Ice-cream & Frozen Yogurt
Ice cream and frozen yogurt are goods which are considered standard rate, therefore variable 1 applies.
Even if you buy the ice-cream and the frozen yogurt from the take away shop and you will eat while you enjoy your time in the park, you still have to pay the price with 20% vat rate.
4. General rule
- Deciding where to always apply 20% or 0% VAT depends on the type of food sold.
- Any food which is cooked and hot has 20% VAT on it. If it is cold then the other variables has to be considered
- If you eat in then 20% vat will be charged. But if you take away then the other variables has to be considered
As long as one variable kick in and makes the food taxable at 20% then automatically the food will be sold at standard rate.
Most take away and catering businesses do not receive accurate and detailed advice on how to apply VAT on their sales and that has an impact on their businesses and on the final customers too. As soon as they get VAT Registered they think they have to increase the ALL prices by 20% or they have to consider sales prices 20% VAT inclusive.
Those mistakes and negligence impact the business itself and the final customer; businesses will pay too much VAT to HMRC on sales which didn't have to contain the 20% VAT and customers will pay a higher price for the food which shouldn't cost them that much.
Having an Accountant which take care of your business properly can make a difference.