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VAT 5% hospitality rate: Get the details right

HMRC has now issued detailed guidance about the temporary VAT reduction for the tourist and hospitality industry that starts on 15 July. Neil Warren considers some practical issues.

10th Jul 2020
Independent VAT Consultant
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Guidance about the important VAT rate cut has arrived sooner than expected, which is very welcome. It is reasonable to divide the changes into three sections:

Extra guidance

Further analysis is given in Revenue and Customs Brief 10/2020 and a separate paper that covers issues such as the flat rate scheme, tour operators margin scheme (TOMS) and the VAT position for supplies that straddle the VAT rate change – eg deposits received by hotels before the rate change but where the actual stay takes place after it takes effect.

Food and drink

The rules for food and drink sales by pubs and the like appear straightforward:

  • On-site consumption: All sales of food and drink will be subject to the reduced VAT rate, apart from alcoholic drinks, which are still subject to 20% VAT.
  • Takeaway sales: If it is hot food or a hot drink being sold, and it is not alcoholic, it is subject to 5% VAT – otherwise 20%. Mulled wine will be excluded because it is alcoholic.

Example

In my previous article on the VAT hospitality cut, I considered the takeaway sale of a bottle of beer, café latte, and a cheese and tomato sandwich. Let’s add a packet of crisps and fish and chips to this list and also consider the same package being sold inside the pub or restaurant.

Four of the five items sold inside the pub will be subject to 5% VAT – ie everything but the bottle of beer which is excluded (unless it is alcohol free beer of course).

The difference with the takeaway sale of the same goods is that the crisps are also standard rated (as would be the case with confectionary items such as chocolate bars and ice cream) and the sandwich qualifies for zero-rating as cold takeaway food, as has always been the case.

The difference with the crisps is because ‘hot and cold food’ qualifies for 5% VAT on-site but only ‘hot food’ for takeaway sales.

Tourist attractions

I questioned the definition of an ‘attraction’ in my last article, asking whether admission to a sporting event would come within this definition. The answer is no. HMRC has specifically listed sporting events as an exclusion.

But the list where the 5% rate applies on admission fees is bigger than might be expected: shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions, similar cultural events and facilities.

Note – admission to some facilities is already exempt from VAT under the cultural exemption, mainly relevant to public bodies and not-for-profit organisations. The exemption takes priority over the 5% rate. VATA1994, Sch 9, Group 13.

Example: An admission fee to botanical gardens would be subject to 5% VAT as a cultural facility.

Hotel accommodation

The ‘prepayments’ section of my last article has also been confirmed by HMRC, with a specific reference to paras 30.7.4 to 30.9.2 of VAT Notice 700. In other words, a hotel deposit received before the rate change but where the stay takes place afterwards can be subject to 5% VAT but at the option of the business owner. 

Flat rate scheme (FRS)

The guidance also confirms that the relevant flat rate percentages for categories covered by the reduced rate will be adjusted temporarily. This is a surprise – I didn’t expect this to happen.

The two most relevant categories will be ‘catering services including restaurants and takeaways’ at 12.5% and ‘hotel or accommodation’ at 10.5% - possibly ‘Pubs’ at 6.5% although most pubs have an annual turnover above the FRS threshold of £150,000 so rarely use the scheme. At the time of going to press, there is no detail about the new percentages.

Mixed supplies

The guidance about VAT on admission charges helpfully gives two examples of supplies where more than one rate of VAT applies, usually 20% and 5%.

One of the examples confirms the admission fee for a brewery tour will be subject to 5% VAT, even if the fee includes some food and drink as part of the tour – ie the food and drink is ‘incidental’ to the tour. But if eating and drinking was the main priority, it would all be subject to 20% VAT.

The key wording is as follows: “It is the responsibility of each taxpayer to demonstrate that its supplies are eligible for the temporary reduced rate.” This is an important sentence: it recognises that there will be grey areas but as long as a sensible and reasonable approach is adopted to each practical situation, HMRC will hopefully accept the calculations made by business owners to work out how much VAT is due. Mixed supplies are always a challenge.

Conclusion

Until this guidance was issued last night, I had many concerns about how the new rules would work. I felt more off-track than a blindfolded cyclist who had a few too many drinks. But the waters are now much clearer. Hopefully, business owners can move forward and be ready for the big VAT saving bonanza day on Wednesday.

Rebecca Benneyworth and Neil Warren join Any Answers Live this Tuesday to chew over the key measures announced by the Chancellor in his summer statement and answer your questions on the temporary VAT reduction. Register now to join this popular session.

Replies (40)

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By neilowen
11th Jul 2020 12:36

Hi Neil
I agree that HMRC (who must be congatulated - as must you! - on the speed with which they have put out some reasonably comprehensive details) have made the position much clearer with their various publications. It is a shame that the reduced flat rate percentages are not available, but presumably they will be by the time they need to be used. But my big question, to which, despite my contacting HMRC on Friday to try to find out, I cannot find an answer, is: will there be any anti-forestalling provisions? Will the normal tax point rules be specifically overriden to ensure that holiday accommodation, for example, booked and paid for or invoiced by mid-January 2021, for a stay in summer 2021 or even summer 2022, will not be eligible for the reduced rate? You would expect so, but nowhere is there any mention of this issue and it does not look as if the SI has yet been published. There is an urgent need to know, not least because some hotels from Wednesday may well make pre-paid reservations for nights after 12 January 2021.
Neil

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Replying to neilowen:
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By David McK
11th Jul 2020 16:43

The actual point of sale takes preference over the invoice transaction date. My guess is pre bookings and deposits paid for future events would not avail of the 5% rate if the actual reservation is after the reduced VAT cutoff date 12th January 2021.

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Replying to David McK:
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By Echo761
13th Jul 2020 10:25

David, I am not sure I understand your terminology.
The "tax point" rules would surely apply?

So for example if you take a deposit for holiday accommodation (before 12 Jan - but holiday after 12 Jan) it would be liable to be accounted for at the date it was taken - as it is payment for a future taxable supply.
The issue arises from the fact the future taxable supply will be liable to the 20% rate (assuming the reduced rate period is not extended) but at the time the deposit is taken it is liable to the reduced rate.
So I can see the point raised about anti-forestalling. I.e. pay for the holiday up front and you get it for 5% VAT rather than 20%... et voila! a good saving and incentive and legal.

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By David McK
11th Jul 2020 17:08

Neil Warren when do you think we will know about the changes to the Flatrate?

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By the_drookit_dug
11th Jul 2020 19:40

Given the differing treatment of cold takeaway food and drink between on-site consumption and takeaway, it's worth noting HMRC's definition of premises at https://www.gov.uk/hmrc-internal-manuals/vat-food/vfood4580

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By pohopetch
12th Jul 2020 02:07

You say "In other words, a hotel deposit received before the rate change but where the stay takes place afterwards can be subject to 5% VAT but at the option of the business owner. " But where the accommodation is charged inclusive of VAT, and the owner decides to re-invoice at 5% VAT having received the deposit or full payment in advance, they would have to credit the VAT difference to the customer (probably resulting in a cash refund) otherwise they would be increasing the price of the supply of the services to the customer if they kept the total the same. So it seems there would be no point in the business owner choosing to do this unless they like complex paperwork. Or have I missed something?

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Replying to pohopetch:
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By Constantly Confused
13th Jul 2020 08:02

pohopetch wrote:

You say "In other words, a hotel deposit received before the rate change but where the stay takes place afterwards can be subject to 5% VAT but at the option of the business owner. " But where the accommodation is charged inclusive of VAT, and the owner decides to re-invoice at 5% VAT having received the deposit or full payment in advance, they would have to credit the VAT difference to the customer (probably resulting in a cash refund) otherwise they would be increasing the price of the supply of the services to the customer if they kept the total the same. So it seems there would be no point in the business owner choosing to do this unless they like complex paperwork. Or have I missed something?

If the price was paid in full then the business would need to refund the 15% VAT overcharged (easy enough to do).

If it was a deposit, then the customer has just paid a bigger deposit:
Rental £500 + VAT
Deposit £100 + VAT (£120)
Balance due later £400 + VAT (£480)

Reissue invoice:
Deposit £114.29 + VAT (£120)
Balance due later £385.71 + VAT (£405.00)

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Replying to Constantly Confused:
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By pohopetch
13th Jul 2020 10:29

Thanks for the comment - but you're thinking in the context of a hotel perhaps. This client is a large campsite with 460 pitches - nearly all tents paying relatively small amounts e.g. £24 per night for typically 1 to 3 nights, all booked and paid in full in advance. So for thousands of bookings certainly not "easy enough to do" to refund the 15% VAT element. All pricing is "inclusive of VAT" in the terms. So is there an obligation to refund the VAT? If they do not refund the VAT, must they then still account for the VAT at the 20% rate on those bookings made before 14th July but for stays after that to avoid the "unjust enrichment" claim?

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Replying to pohopetch:
Ivor Windybottom
By Ivor Windybottom
13th Jul 2020 09:37

My understanding is that there is a difference between accommodation sold for £120 (i.e. a VAT inclusive price) and one sold for £100+VAT.

The former may give a refund to the business, while the latter gives the refund to the customer.

It's all in the contract terms.

I assume "unjust enrichment" wouldn't apply to a business reclaiming a VAT saving if it is clear the market price of £120 is fixed, with VAT just one of many overheads for the hotel.

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Replying to Ivor Windybottom:
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By pohopetch
13th Jul 2020 10:34

Hi Ivor - see my reply to the post above. The prices are all inclusive of VAT, but I imagine the client is on sticky ground if they just keep the 15% VAT on those pre-paid bookings made prior to 15th July as a windfall, many of which were made months ago and would have already be accounted for at 20% VAT inclusive and the VAT return submitted. They will certainly be keeping the difference for the bookings made after 15th July as it is clear in their terms that the price includes VAT at the prevailing rate. It is just the VAT treatment on bookings made and paid in full earlier but for stays after 15th July that are concerning us.

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By chancewind
13th Jul 2020 10:06

If mulled wine is 20%, what about the non alcohol beers which have .05 or .5% alcohol.

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Replying to chancewind:
Ivor Windybottom
By Ivor Windybottom
15th Jul 2020 16:24

The legislation now makes clear any booze not subject to duty, i.e. up to 1.2% alcohol, will be OK for the reduced rate (when for consumption on the premises if not sufficiently hot), while everything subject to duty is still at 20%.

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By Ianhodges
13th Jul 2020 10:14

How about this scenario-
Customer is invoiced and pays in full in August 2020 for holiday accommodation for a holiday to be taken in April 2021.
5% or 20% VAT to be accounted for ?

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Replying to Ianhodges:
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By Echo761
13th Jul 2020 10:29

I say 5% as set out in my reply to David above, happy to hear any alternative views as its a real issue.

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By Susie2012
13th Jul 2020 10:43

Hi Everyone,
With regards to the 5%VAT on hot food and non alcoholic drinks for Pubs, Restaurants and cafes.. so this also applicable to takeaway shops, not takeaway sold by a restaurant, but takeaway sold at chinese takeaways, Dominos Pizza..
As the announcement did not say "Takeaway businesses".
I just wanted to be sure
Thank you

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Replying to Susie2012:
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By Tim Robinson
17th Jul 2020 13:44

Hi Susie2012

I had exactly the same question as you and CCH VAT consultants have confirmed that the reduced rate applies to any business supplying hot takeaway food, to include convenience stores selling hot pies, pasties and drinks.

Tim

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By KarenD2020
13th Jul 2020 10:58

Would the sit in sale of ice cream be classed as 5%?

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By nick farrow
13th Jul 2020 11:23

if FHL trader is below the VAT threshold but the lettings agent charges 25% +VAT then I assume he/she will not benefit at all?

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By Sheffield1111
13th Jul 2020 12:54

Can anyone help?Despite 20 mins talking to HMRC I am still no closer to the answers!
We are an independent wedding caterer on the flat rate vat scheme paying 12.5%. We prepare food at our unit but cook and serve at different venues.
I need to check if 1. Can we charge the reduced vat rate of 5% vat between 15/7/20 to 12/1/21 and 2. Can couples who have already booked for summer 2021 (after the cut off) want to prepay before the 12th January cut off. Would they still be able get the 5% rate as the invoice and payment would be within the discounted dates?
Any help would be very welcome.

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Replying to Sheffield1111:
Ivor Windybottom
By Ivor Windybottom
13th Jul 2020 13:44

VAT reduction seems to exclude catering at other venues.

See Notice 709/1 which says in 1.1 "any supplies of food and drink that are supplied as part of a supply of catering services for consumption off-premises remain standard rated."

It also says in 1.3 that supplies of catering "will qualify for the reduced rate unless they fall to be supplies of catering that are supplied off-premises".

The Statutory Instrument with the precise wording and legislation does not yet seem to have been released, so quite how this applies to off-premises catering is not 100% clear.

May be best to wait until there is further guidance, as it seems likely that the legislation is going to be very important for your situation.

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Replying to Ivor Windybottom:
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By Sheffield1111
14th Jul 2020 21:52

Lots like we will be worse off if we could charge the 5% vat anyway. The flat rate scheme% for catering services has only dropped to 4.5 from 12.5.

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Replying to Ivor Windybottom:
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By Echo761
15th Jul 2020 10:03

The law says;

“GROUP 14 - COURSE OF CATERING
Item No

1 Supplies in the course of catering of—

(a)any food or drink for consumption on the premises on which it is supplied, or
(b)any hot food or hot drink for consumption off those premises,
except supplies of alcoholic beverages.

NOTES

(1) Note (3A) to Group 1 (Food) of Schedule 8 applies in relation to this Group as it applies in relation to Note (3) in that Group.

(2) Notes (3B) to (3D) to Group 1 (Food) of Schedule 8(1) apply in relation to this Group as they apply in relation to that Group.

(3) “Alcoholic beverage” means a beverage within Item 3 in the list of excepted items in Group 1 of Schedule 8."

Still not certain.

The point about "on the premises on which it is supplied, or
(b)any hot food or hot drink for consumption off those premises," suggests if you are only a take away then you cannot provide food for consumption on the premises - which are then taken away (and meet the 2nd condition).

Views welcome.

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Replying to Sheffield1111:
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By Echo761
13th Jul 2020 14:17

As the booking, payment of the deposit(full payment), and invoice are all in the "reduced-rate" period and no other tax point is created then yes. The 5% would be applicable.

See VAT Notice 700 about tax points and then Section 30 on Change of rate.

"14.5 Change of tax rate
If there’s a change in tax rate or tax liability, the tax point rules are particularly important in working out what rate of VAT to charge. Section 30 gives guidance on the special procedures to follow."

https://www.gov.uk/guidance/vat-guide-notice-700#changes-in-tax-rates-an...

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By Cruncher Alan
14th Jul 2020 10:23

Hotels- if the stay lasts a few days and is invoiced after today but within 14 days of the stay ending, can they apply the reduced rate to the whole bill.

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By JennaPorter
14th Jul 2020 10:36

We have a sports and social club that does not provide food (apart from crisps etc...) will they still qualify for the 5% on soft drinks and the bar snacks that are purchased to consume within the club house - or do they not count in the category of pubs, restaurants, cafes etc...

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Replying to JennaPorter:
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By Echo761
14th Jul 2020 10:48

HMRC has introduced a new feature... speak to Jim. [email protected] 03000 589 668
He can ask Rishi.

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By newmoon
14th Jul 2020 12:25

Are the new Flat Rate percentages available yet? They aren't showing on here https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay

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Replying to newmoon:
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By Echo761
15th Jul 2020 09:29

Now in here https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay

"Flat rates for types of business
Because of coronavirus (COVID-19) the flat rate for catering (including restaurants and takeaways), accommodation and pubs has been reduced from 15 July to 12 January 2021."

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By Omi Fa
14th Jul 2020 13:12

Would an aircraft sightseeing tour business be considered eligible for 5% VAT?

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Replying to Omi Fa:
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By Echo761
14th Jul 2020 13:30

How does that work? Do you fly in an aircraft to do the sightseeing or do you go to sightsee aircraft sitting on the ground?

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Replying to Echo761:
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By Omi Fa
14th Jul 2020 14:51

Fly in an aircraft and provide customers 'pleasure flights'.

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Replying to Omi Fa:
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By Echo761
14th Jul 2020 16:47

What research have you carried out? Under what heading were you thinking you could qualify for the 5% rate? VAT Notice 709/5 only refers to;

Para 2.16 Temporary reduced rate and TOMS
The temporary reduced rate for hospitality and tourism will have an effect on the mechanics of the TOMS calculation.

The temporary reduced rate applies to supplies:

- in the course of catering
- of hotel accommodation
- shows and similar attractions

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Replying to Echo761:
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By Omi Fa
15th Jul 2020 08:42

Potentially 'Shows and similar attractions'; we are part of the hospitality sector but reading through the HMRC website I cannot see anything that says our business would be specifically included or excluded from the 5% vat scheme. We did qualify for a grant at the beginning of the lockdown under hospitality. An example of our attractions is a London sightseeing tour (helicopter).

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Replying to Omi Fa:
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By Echo761
15th Jul 2020 09:26

It sounds like your business has a number of strands to it, but if you consider the recently issued law on the reduced rate I don't see that you are covered;

GROUP 16 - SHOWS AND CERTAIN OTHER ATTRACTIONS
Item No

1 Supplies of a right of admission to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas and exhibitions and similar cultural events and facilities but excluding any supplies that are exempt supplies by virtue of Items 1 or 2 in Group 13 of Schedule 9(4).”.

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Replying to Echo761:
Ivor Windybottom
By Ivor Windybottom
15th Jul 2020 16:34

Echo761 wrote:

It sounds like your business has a number of strands to it, but if you consider the recently issued law on the reduced rate I don't see that you are covered;

GROUP 16 - SHOWS AND CERTAIN OTHER ATTRACTIONS
Item No

1 Supplies of a right of admission to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas and exhibitions and similar cultural events and facilities but excluding any supplies that are exempt supplies by virtue of Items 1 or 2 in Group 13 of Schedule 9(4).”.

Can't see anything about pleasuring customers in there!

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By sarahlloyd_07
14th Jul 2020 13:53

Would you be able to confirm something please. Is the sale of a cold drink (fizzy can) standard rated if it is with a reduced rate hot takeaway meal, but temporarily reduced rated if sold with a meal on premises? I am specifically thinking about cafes and fish and chip shops with take away option.

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Replying to sarahlloyd_07:
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By Echo761
14th Jul 2020 16:50

Have you carried out any research? VAT Notice 709/1 Sections 1.1, 1.3 and 4.1 refer.

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Replying to sarahlloyd_07:
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By Echo761
14th Jul 2020 16:50

Have you carried out any research? VAT Notice 709/1 Sections 1.1, 1.3 and 4.1 refer.

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Replying to sarahlloyd_07:
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By Jason Croke
16th Jul 2020 16:36

You are correct. My reading of the legislation and guidance is that a cold drink can be reduced rated when eating in/dining in, but it is standard rated when the cold drink is taken away. This is because the reduced rate applies only to HOT takeaway food.

So your takeaway would reduced rate the fish and chips but standard rate the drink, if the shop has an eating area, then the food and drink can be reduced rated.

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By ann12
22nd Jul 2020 14:44

In the example of adding a packet of crisps you show that if they are eaten in the pub the VAT charged was 5% and if taken away 20%. I could not find anything on the HMRC website to back this up so did a web chat with them. The advisor said that in both instances the VAT would be 20% but when he spoke to the technician, the advise was the same as you had given. It seems HMRC do not fully understand the parameters for the reduced VAT but I now have a copy of the web chat as evidence of your example.

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