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?
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I identified three reasons:
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.
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.
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 is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.