VAT on Food and Drink at Cafes – How Does it Work?

Do cafes have to register for VAT?

Mandatory Registration

Cafes must register for VAT if they meet the VAT registration threshold which applies to their taxable turnover . From the point of registration, they must charge customers VAT on all qualifying goods and services sold.

Voluntary Registration

Cafes have the option to voluntarily register for VAT even if their turnover falls below the mandatory threshold. Choosing to register can allow cafes to reclaim VAT on their business-related purchases, which can be financially beneficial.

However, we’d recommend seeking advice from our team of professional accountants to help you understand implications of voluntary VAT registration. We can help provide insight into how this decision could affect cash flow and the overall financial health of the business.

VAT Categories for food and Drink at Cafes

Generally, food and drink sold in a cafe fall into one of two VAT categories – standard rated at 20% or zero-rated at 0%.

The VAT rate applied primarily depends on whether food and drink are consumed on the premises or taken away. This distinction is crucial for cafes when determining the correct VAT to charge.

For customers eating in, the standard VAT rate of 20% applies to all food and drinks. This rule also extends to items that HMRC classify as zero-rated if sold as a takeaway, for example:

• Cakes
• Plain biscuits (not chocolate-covered)
• Fruit and vegetables
• Bread and bread rolls
• Flapjacks or cereal bars
• Cold sandwiches and wraps

On-premises consumption refers to food and drinks consumed within the confines of the café or restaurant. This includes eating at tables, whether inside or outside, provided by the establishment.

VAT on Takeaway Food and Drink

Conversely, the VAT treatment for takeaway food and drink is more nuanced, varying with the type of product and its temperature at the point of sale.

Food Preparation

Takeaway food that requires further preparation by the customer, such as reheating or assembling, is usually eligible for zero-rated VAT.

It is essential to provide explicit reheating or preparation instructions with these products, which confirms they are not ready for immediate consumption when sold. Allowing hot food to cool to ambient temperature before a sale can also indicate a product is not ready to eat immediately.

Nevertheless, numerous exceptions exist within VAT regulations, and not all items that require additional preparation by the customer will be automatically zero-rated.

Hot Takeaway Food and Drinks

If you are serving hot takeaway food or drinks, you must apply the standard rate of VAT. The standard rate is applicable based on several criteria that determine whether the food is considered ‘hot’ for VAT purposes, including:

• Temperature of sale – The item is considered hot if served at a temperature exceeding the ambient room temperature.
• Intended consumption – Food and drinks intended to be consumed while still hot, such as pizza, teas and coffees, are categorised as standard-rated VAT as they are designed for immediate hot consumption.
• Heating an order – Items that are heated specifically upon customer request to be delivered warm qualify as hot items for VAT purposes.
• Heat retention after cooking – Foods kept warm using heating equipment like plates or insulated packaging are considered hot.
• Advertised as hot – Products advertised or labelled with terms that imply heat, for instance, ‘freshly baked’ or ‘roasted’ are classified as hot.

Cold Takeaway Food and Drinks

Generally, cold takeaway food items are zero-rated. This includes salads, cold sandwiches and wraps, bakery products such as cold pastries and bread rolls, fresh fruit, and other items not intended to be consumed hot.

However, there are several exceptions where certain items remain standard rated as specified by HMRC, irrespective of being cold. A notable example is ice cream, which attracts the standard VAT rate regardless of whether it is eaten in or taken away. Other examples include:

• Crisps
• Chocolates, sweets, and chocolate-covered biscuits
• Sports nutrition bars
• Bottled water, fruit juices and smoothies

VAT Regulations Under the Spotlight

The nuances of VAT categorisation can sometimes become the centre of national attention. Two cases have been particularly instrumental in illustrating the challenges that cafés face with VAT classification.

The ‘Pasty Tax’ Controversy

The complexity of these regulations became a hot topic when the government considered applying VAT to all hot takeaway foods. This spotlighted traditional pasties, which are typically sold hot. However, since they are not always eaten immediately, it sparked widespread debate about the appropriate VAT rate to apply. Should a pasty cooled to room temperature after sale be taxed as a hot item?

This dilemma illustrates the challenges that cafes face in accurately determining the VAT status for items that seem to occupy a grey area between ‘hot’ and ‘cold’ takeaway foods.

Jaffa Cake Debate

Similarly, the classification of Jaffa cakes also became a subject of intense debate. These sweet treats, with a sponge base and chocolate coating, raised the question of whether they should be considered cakes, which are zero rated, or as biscuits, which if chocolate covered, would attract the standard VAT rate.

The matter was significant enough to warrant a legal discussion, resulting In Jaffa cakes being ruled as cakes for VAT purposes. Despite the presence of chocolate, their ingredients and texture led to this conclusion, therefore ensuring they are zero-rated.

The Ruling of Poppadoms

Adding to these illustrative cases is the ruling against Walkers regarding their Sensations Poppadoms. Despite arguments that they should be zero-rated based on their primary ingredient, gram flour, the tribunal found them to be comparable to potato crisps and, hence, subject to the standard VAT rate.

Cafes have tactically pivoted their snack offerings towards zero-rated options like lentil and tortilla crisps. These products do not attract the standard VAT rate, unlike potato crisps, allowing cafes to improve their profit margins by keeping a greater portion of the sales price.

These instances are a testament to the everyday challenges cafes encounter, where the correct classification of every pasty or cake has financial consequences. They exemplify the ongoing vigilance required in the food and beverage industry in the face of intricate VAT regulations.

What Does This Mean for Cafes?

Applying VAT rules means cafes must train staff to categorise and bill food and drink correctly. This requires clear labelling of each item to reflect its VAT status, which is particularly important for products like sandwiches that may be taxed differently depending on where they are consumed.

Tills must also be appropriately programmed to add VAT accurately for each item scanned. Maintaining an up-to-date product catalogue listing all food and drink lines by VAT treatment is best practice.

There’s added complexity where customers can order a mix of standard and zero-rated items. Software features like item modifiers and surcharges help bill mixed sales orders correctly.

Since HMRC’s classifications are subject to periodic updates, staying informed is vital. Engaging with a team of accountants like DS Burge & Co can provide invaluable VAT guidance, safeguarding against non-compliance risks.

Conclusion

The determination of VAT charges for cafes depends on the food’s temperature and the place of consumption. Understanding the distinctions between standard and zero-rated VAT is essential for café owners.

If you are unsure about VAT regulations for your café or restaurant, and need help managing the complexities, we can provide the necessary business tax advice to ensure you not only comply with the latest VAT regulations but also optimise your tax position, avoiding unnecessary penalties.