Reduced Rate on Eat-in and Takeaway Hot Food and Beverages

HMRC has published some additional guidance, it does not cover every individual scenario and so there may be further questions in which case please get in touch.

Historical Situation

Eating in (dining in), is seen as a catering service and standard rated, it does not matter what the customer is eating, the act of sitting down to eat is standard rated.

Takeaway has always been more complex, but if the customer takes away a cold prepared food item then the food item is zero rated.  The complexity arises because a customer might buy a cheese sandwich or a salad (cold prepared food) with a soft drink and crisps – a typical “meal deal” – and the crisps and drink are standard rated, and the sandwich or salad is zero rated.

We will not go much further in terms of what is “cold prepared food”, but we just need to be mindful some food items like crisps are standard rated, hot food taken away was standard rated, cold food taken away is zero rated.

Reduced Rating

The temporary rate applies from 15th July 2020 to 12th January 2021

The easiest approach is to ignore the items we already know are zero rated, those items remain zero rated (takeaway cheese sandwich, muffins, etc).  Our focus turns to those items which have traditionally been standard rated such as any meal eaten in (sit down meal), any hot takeaway food (fish and chips) and beverages and it’s easier to look at it from an Eat In and Take Away perspective as there are nuances that arise.

So, what impact does the reduced rate have?

Soft Drinks (non-alcoholic beverages)

A non-alcoholic beverage can be hot or cold (water, tea/coffee, soft drink).

• EAT-IN.  Non-alcoholic beverages (hot or cold) can be reduced rated.
  • For example, customer buys a coffee and a bottle of Coke, in a cafe and sits inside to drink, coffee is a hot beverage consumed on premises = reduced rated, the Coke is a cold beverage consumed on premises = reduced rated.
• TAKEAWAY.  Non-Alcoholic beverages (hot) can be reduced rated, but not cold beverages.
  • For example, customer buys a coffee in a café for takeaway plus a bottle of Coke. Coffee is a hot takeaway beverage = reduced rated, the Coke is cold takeaway beverage = standard rated.

The difference is thus; drinks hot or cold can be reduced rated dining in, but only hot drinks can be reduced rated when taken away.

HMRC guidance is still quite vague, for example, a pub sells a gin and tonic to a customer dining in/drinking in.  The tonic is non-alcoholic, the gin, very much alcoholic. Does the pub split the VAT between 5% for the tonic and 20% for the gin?  HMRC is silent on this.

Food

As noted earlier, cold foods are usually zero rated and that is unchanged.  Buying a sandwich or salad from Pret for takeaway is already zero rated, as is buying a muffin from Greggs.  But zero-rated foods became standard rated when those foods were eaten in.  So, a sandwich from Pret but eaten in was a standard rated supply, as was the Greggs muffin.  Eating in changed zero rated things into standard rated to reflect the customer was buying “a service” rather than just cold food.

Hot food eaten in or taken away was also standard rated, takeaway pizza, curries, fish and chips were all standard rated when taken away.  Some foods are “naturally cooling” and can be eaten hot or cold, mainly pies, sausage rolls and pasties, these were zero rated when taken away, standard rated when eaten in and the reduced rate now applies to pies and pasties eaten in.

The reduced rate therefore mainly applies to standard rated supplies eaten in and that reduced rate extends to hot takeaway foods also.

• EAT-IN.  Foods eaten in/on premises can now be reduced rated.
  • For example, a family go out to their local Indian restaurant for a meal, they all order food, sides and starters, Mum and Dad order a wine and a beer, and the kids have lemonade.  The food and the soft drinks are reduced rated, the beer/wine is standard rated.
• TAKEAWAY.  Hot foods taken off premises are now reduced rated but cold drinks are not.
  • For example, if that same meal was ordered “to go”, the meal can be reduced rated, but all of the drinks are standard rated as a mixture of alcohol (not reduced rated) and soft drinks (not reduced rated).

Other scenarios

1. You visit Starbucks and order a coffee, a hot panini and a muffin.  If you eat in, the coffee, panini and muffin will be reduced rated.  If you take away, the coffee and panini will be reduced rated and the muffin zero rated.
2. You buy a meal deal, consisting of a ham sandwich, packet of crisps and a drink (tea/coffee or Pepsi/water).  If you eat in, the meal deal is reduced rated.  If you take away, the sandwich is zero rated, the crisps are standard rated, and the drink will either be reduced rated (if a hot drink) or standard rated (if cold drink).
3. One more example, a couple visit the pub, they buy a beer, a coffee, a ploughman’s sandwich, a packet of crisps and burger & chips.  If eat in, everything is reduced rated except the beer.  If take away, the beer remains standard rated, but the crisps are also standard rated as they are not hot/takeaway.  If we swap crisps for say an iced lolly, as it is cold and confectionery, the lolly would also be standard rated if taken away.
4. Eat in pizza with soft drink cost £19.99 and before VAT rate cut would be £16.66 net + £3.33 VAT.  With the new reduced rate, it is now £19.04 net + £0.95 VAT, a margin boost of £2.38

Hopefully these examples help in understanding the rules, but if in doubt, then please get in touch.

Eat Out to Help Out (Discount Scheme)

Separate to the reduced rate VAT, there is a scheme that will run for 12 week days in August (3rd August to 31st August), offering customers a discount on Mondays, Tuesday and Wednesday for those who choose to eat in/on the food premises.

The scheme DOES NOT apply to TAKEAWAY ONLY establishments, the premises must have a seated area, so this excludes burger vans and similar.

The business must register for the scheme here https://www.gov.uk/guidance/register-your-establishment-for-the-eat-out-to-help-out-scheme

Eligibility is based on your business having a seated area where people can dine/eat, it can be a shared area such as a food court at a shopping area. You must keep records of the total number of people who have used the scheme, total value of transactions under the scheme and total amount of discounts given.

Once registered, you can file weekly claims and HMRC promise to refund within 5 days.

The practical mechanics of the scheme are that the customer will pay a portion of the bill and the business claims the other portion from HMRC.  From a VAT perspective, an example might be useful.

Customer dines in – pizza and soft drink – costs £19.99 – whole meal is reduced rated          (eat in food/drink).  The VAT fraction on this is £19.04 net + £0.95 VAT.

The discount is 50% up to value of £10, so customer pays £9.99 and business claims the other £9.99 from HMRC. In this example, customer has paid £9.99 including 47p VAT and   the HMRC payment will be for £9.99 and 47p VAT, the business thus receives £19.99 (95p VAT) in total.

VAT (95p) is still due on the full selling price, in theory half the VAT is declared on the VAT return when customer pays, the other half declared when HMRC pays.  In reality, as claims can be made weekly and paid quickly, by the time to complete the vat return, the business will have received the VAT element from both customer and HMRC.

You may need to consider your cashing up procedures, your till will be “down” at the end of the day because if you took £100 sales and customers only pays £50, your cash/credit card sales will not balance to sales actually made.

You may need to consider how your accounting and till/EPOS software can handle the scheme, it is not a discount as such, more that the sale will be settled by two different people (the customer and HMRC) at two different times (when dining/a week later).

The scheme excludes alcohol and alcohol remains as a standard rated supply.

If you offer a deal (burger & chips plus a pint of lager) then you need to split the VAT rates between the food and drink.  Consider how your till receipt and software will handle this.

Service charges and tips are excluded from the scheme, so consider how your till/EPOS handles a party of 8 dining in, entitled to a “discount” on the food but not the alcohol or the service charge and inevitable tip.

Practical Matters

The business will need to consider how it will record these sales in its tills/EPOS.  Consider:

1. The VAT rate change occurs mid-month, this means items that were standard rated last week are now reduced rated, can your tills and accounting software produce accurate reports for pre and post VAT rate change?
2. Will you need to reprogram your till/EPOS to reflect the nuances of the VAT changes, for example, your till may have had a can of Coke locked down as standard rated whether eaten in or taken away, but now that Coke has two different VAT rates if taken out/eaten in.
3. Are your staff suitably prepared and trained to handle any changes you’ve made to the till?
4. The law does not require you to pass on the VAT saving, many businesses will use the VAT drop to make additional margin, to compensate for fewer customers and longer table turnaround times  but you need to consider the customer may not see it that way.
5. If you are reducing prices, do you need to reprint your menu? What will the cost of these amendments, along with the time involved in updating your till/EPOS be and will your margins still work if you do reduce your prices?
6. What if the customer asks for a receipt because they are on business and their meal cost is VAT recoverable?  Will your till produce a receipt that splits sales between standard, zero and reduced rate?
7. Eat Out to help Out guidance indicates that the scheme can run alongside any of your own schemes you might be running during August, for example, most pubs and restaurants offer discounts for mid-week dining already, the business can choose to continue their mid-week discount deals in addition to the government scheme or can revise their marketing opportunities for other days of the week/meal deals, etc.

There are likely some other issues which might arise, the key is to get in touch and talk through the issue, here at Rayner Essex we have expertise in cloud accounting and VAT giving us a prime position to assist our clients and other businesses who might be struggling with some or all of this VAT cut.

That’s a lot to take in?

Yes, we never said VAT was simple, but it can be used to benefit the business in several ways.  So if you are looking to improve your efficiency in VAT or just wanting to ensure your business is compliant with the myriad of VAT rules (Making Tax Digital, Brexit, etc), then if this article has caught your attention,  please contact Jason at Rayner Essex or fill out the form below as we may be able to offer you a free VAT health check to see if we can help further.