VAT warning to cafes and sandwich bars

Barista serving take away coffee
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Neil Warren investigates whether fast food businesses are overstating their zero-rated sales. Are staff making big VAT errors without realising what they are doing?

VAT on food has recently enjoyed its 15 minutes of fame in the tax spotlight. The VAT liability of chocolate brownies, milkshakes, grilled ciabattas and breakfast muffins have all been considered by a range of tribunal judges in recent months.

Tax boost for HMRC?

I do wonder whether HMRC is missing out on a tax bonanza in the catering industry because of on-premises sales of cold food being incorrectly coded by till operators as a take-away deal. How many items are being incorrectly zero-rated?

This a ticking time bomb for business owners who are oblivious to a problem that might eventually alert HMRC interest. I have suspected this problem has been happening for years, so thought I would get out on the city centre streets and do a mini sample to test current practices.

60% sample failure

I ordered my lunch last week in five different cafes and sandwich outlets of various sizes, from local establishments through to well-known national chains. My order consisted of a sandwich, hot drink and packet of crisps on each occasion. On just two out of five occasions did the person serving me ask whether I was going to eat my meal on or off the premises. Just to clarify, hot drinks and crisps are always standard rated but cold sandwiches consumed off the premises are zero-rated.

Reasons for errors

On all three occasions that the server failed to ask me about my eating intentions, they charged me the ‘take away’ price for my sandwich, ie treated it as a zero-rated sale.

This is good news, a saving of about 70p compared to a standard rated sale. But why did they not ask me that all-important question on which the VAT liability depended?

I identified three reasons:

Busy staff

During a busy lunch period, the server’s priority is to deal with the queues as quickly as possible to ensure customers are not kept waiting for too long. This is a wise strategy but it means that minor issues such as VAT can easily get forgotten.

Staff inexperience

Without being unkind, one of the servers was clearly struggling to get his head around the massive number of drink permutations he had to deal with: soya, almond, skimmed or coconut milk; caffeinated or decaf option; single or double shot of coffee; small, medium or large size cup. I sympathise with him.

Staff training

It is an accepted fact that there is a high staff turnover in the catering trade, so staff training is probably not as detailed as it should be. The management’s priority is to ensure staff can work the coffee machine safely. I suspect that getting the VAT procedures right is not as high on the training schedule as health and safety issues.

Business owners beware

None of my three reasons above relate to a deliberate intention of the operator to underpay VAT, it is all about VAT errors rather than fraud. This makes sense because the operators (employees) would have no financial gain by getting the VAT coding wrong. 

My key message is that although the problems I observed are being caused by staff errors, it is the business owners who would pay the penalties should HMRC investigate. HMRC would review the takings in each VAT category and decide whether the proportion of zero-rated sales was too high compared to outlets of a similar size in the same area.

Now may be a good time to advise your catering clients that a review of their VAT procedures might be worthwhile, especially with MTD lurking around the corner. You never know when HMRC might come knocking at the door.

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

Replies

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20th Feb 2019 09:40

Why can't the bill say EAT IN or TAKE OUT in big letters at the top. It is fine when the bill details the VAT, as in two Pret a Manger bills I looked at just before your article was published. However, with the simplified under £250 till receipt it is impossible to know the VAT position and that is even when detail of what was purchased is provided. Great article by the way on yet another VAT situation that doesn't work in practice, exactly for the reasons you have outlined.

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to raybackler
20th Feb 2019 10:40

What happens if the customer says Take Out but then "changes their mind" before leaving the store and takes a seat?

I am sure it happens quite frequently. What's HMRC's stance on this?

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to saltimbamba
22nd Feb 2019 15:15

Exactly, it is bound to happen.

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20th Feb 2019 09:57

Good article explaining the situation. I hope you claimed the lunches as business expenses for the purposes of the article!

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to Rammstein1
20th Feb 2019 11:40

test purchase rather than a business lunch. better tax treatment ;)

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By NeilW
20th Feb 2019 10:34

Another situation where the VAT rules are just plain stupid and get in the way of business.

Hopefully post Brexit some future government will do away with VAT and shift to a simple 'stuff sold to consumer' sales tax that is simply a charge to business on the relevant turnover.

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to NeilW
20th Feb 2019 17:14

Quite. But far too straightforward a solution for our overbearing self important law makers. It’s where the Office of Tax Simplification should have started and where they really could have done some important useful work.

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to NeilW
22nd Feb 2019 15:23

I hope so too. Whilst VAT blight's every business, in most business to business cases it washes its face. The main effect of VAT is as a consumer sales tax. There are exceptions mostly where exempt or partially exempt businesses can't claim back all of the input tax. These type of businesses are usually performing an essential service, such as, education, charities or medical. By pitching a sales tax by type of business, it could be made to work and those already exempted could continue to be. Nobody would have to worry about claiming back input tax, which is the greatest business inefficiency in the current system.

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20th Feb 2019 10:49

Welcome to the real world where the ludicrous distinction between food items causes complications that are not always overcome for small businesses who try their best but ultimately would just rely on hoping for the best, giving an inspector a till roll, and denying everything if queried.

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20th Feb 2019 11:00

What is the vat position on a cold sandwich when you eat outside on chairs provided by the sandwich shop?

Does eat in definitions cover the total premises or the covered premises

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to stephen_walton
14th Mar 2019 12:46

That's a different can of worms. I heard of a beach café that claimed the whole beach as its premises to mitigate exempt income from its attached amusement arcade.

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to stephen_walton
14th Mar 2019 12:51

That's a different can of worms. I heard of a beach café that claimed the whole beach as its premises to mitigate exempt income from its attached amusement arcade.

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20th Feb 2019 11:11

Perfect opportunity for the Office of Tax Simplification to, post-Brexit, massively simplify the UK's VAT rules.

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20th Feb 2019 14:06

Well if the UK government wasn't so greedy in trying to squeeze every last penny out of us citizens though whatever means they can, we would not have to worry about eating food inside premises or outside and whether the drinks were hot or not.

Unfortunately by publishing this article, this matter will now be brought to the tax-man's attention and it will only be a matter of time before he/she makes life hell for fast food businesses.

Don't forget, a business is set up to generate some income for it's owners, provide employment for its staff members and also a service to local residents not forgetting the high rent and council rates the owner has to pay. It's primary purpose is NOT to generate more and more tax revenue for our greedy, uncaring government.

Maybe articles should focus on how the government wastes the precious taxes we pay on useless ventures like the new £3bn aircraft carrier which is on a useless 11 week cruise across the Atlantic with two F-35 fighters on board just to show off.
https://www.standard.co.uk/news/uk/hms-queen-elizabeth-royal-navys-new-3...

Or how about half of the Royal Navy's submarines now sitting in docks due to cracks and about to be taken out of service?
https://www.express.co.uk/news/uk/766212/Nuclear-warning-royal-navy-subm...

It is no use taxing citizens out of every miserable penny they earn (even on their sandwiches) when the government should not be wasting billions in one hit every year.

If we citizens showed extreme resentment at each new tax that is introduced, it might stop our government from designing ever new ingenious schemes to tax us even more and focus on their wasteful tendencies.

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to Nefertiti
20th Feb 2019 15:47

This is a perfect example of "its not my money". we had a client who had been a Mayor of his borough who always queried our bills. I lived in his borough and asked him why he was so frugal with oour council tax. The answer was "its not my money"

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20th Feb 2019 15:30

In practice this law is al but impossible to implement in the real world for businesess big and small alike. I "sense check" the total numbers each year with business owners, and question any quarter which looks out of line with seasonal trends.

Very often the reason for an anomoly is just a new staff person who had no idea about VAT. And, as this thread correctly states, in any decent cafe the menu options are so extensive that if your staff have got time to worry about the VAT button in the lunch hours then you are probably losing money by not being busy enough.

Is this an EU regulation? The reason I doubt this is the pasty tax Budget, when numpty Osborne would have had all my bakery clients sticking a thermometer in each batch to see if it was 20% or 0%.

I somehow doubt we'll make better laws without the EU. The majority of the daft laws I have disliked - IR35, 17% corporation tax rate, poll tax, pasty tax, dividend tax credit, Universal Credit 6 to 8 week wait for example - were 100% made in the UK.

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20th Feb 2019 20:32

Is this really an issue? If it were then wouldn’t an inspector be knocking on door of every food outlet in the country as we speak?

I think the very fact these errors do happen is because owners know HMRC can’t expect them to micromanage the till operator and get every sale 100% perfect for VAT - for the very reasons you listed.

I wouldn’t be worried, but then again I’m not an owner of such a business!

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to Usergnome
22nd Feb 2019 15:14

No doubt they will wait six years so the case is well worth following up for the missing VAT. It isn't that long ago that Fish and Chip shops were targeted. HMRC, backed up by the Money Laundering Regulations, do single out cash based businesses.

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23rd Feb 2019 15:14

The main reason though isn't any of those: it's the fact that the VAT regulations are ridiculously over-complex. If people can't cope dealing with VAT correctly in their day-to-day jobs, is it really the fault with them or their training, or are we asking too much?

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25th Feb 2019 09:49

Typical, complicated rules, it does not surprise me you recorded a 60% sample failure rate. But it just shows a lot of braininess and business owners carry on regardless.

Just step back from it, how have we got in this situation if similar items of food is consumed on or of the premises its taxed different.

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