Is there VAT on drinks

VAT on drinks for human consumption are usually liable to the VAT zero rate but some items are always standard-rated. These include:

drinks supplied in the course of catering
alcoholic drinks
sports drinks
soft drinks and mineral water

Restaurants must always charge VAT on everything eaten either on their premises or in communal areas designated for their customers to use, such as shared tables in a shopping centre or airport food courts.

In addition, restaurants and takeaway vendors must charge VAT on all hot takeaways and home deliveries, but do not need to charge VAT on cold takeaway food unless it’s to be eaten in a designated area.

From 15 July 2020 to 31 March 2021, certain supplies of catering and hot takeaway food that would normally be taxable at the standard rate of VAT, will be liable to the reduced rate of 5%.

UK VAT Legislation

To give some background to the reason we have the current UK VAT legislation for food and VAT on drinks, the nuances are not inherited from our time in the EU as with many other areas (the UK was out of step with the rest of the EU in terms of complexity for VAT and food). Instead it has it origins in the predecessor tax, being sales tax.

When VAT was introduced in 1972 the UK adopted the key principles of the sales tax put in place after the 2nd world war. These saw zero rating being available for basic foods and drinks but with exceptions to this for ‘luxury’ (ie non essential) or ‘processed’ items. This did not include cakes and biscuits but did include confectionery.

So without the EU provisions to restrict changes and with the passage of time since the 2nd world war and the significant amount of innovation in the snacking and confectionery sub-sector, it would surely seem feasible and necessary to revisit this area.

The Basics of VAT on Food and VAT on Drinks

Some areas of VAT legislation for VAT on food and VAT on drinks are not complex and are relatively straightforward, with the VAT treatment of most fresh produce and cooking ingredients for human consumption etc being clear cut in the guidance. This includes the following categories (this is not an exhaustive list):

However even with these basic items there is immediate complexity as the following are standard rated:

Powders for making strawberry and banana milkshakes (but not chocolate which is zero rated)

The following are standard rated as they are specifically called out as exceptions to the zero rating:

Bottled water

The Complex Areas of VAT and Food/Drinks

VAT on food has further complexity arises with products in the following categories:

smoothies/beverages
sports nutrition products

These categories in many cases sit in grey areas between the clear cut standard rated and zero rated products and challenges from the tax authorities have arisen in recent times as a result of significant innovation in these categories of the food and drinks industry, creating products not envisaged when the VAT legislation and guidance was drafted.

In short there is effectively a significant clash between a move within the industry, backed up by consumer demand for more healthy innovative products (which use less processed and more natural ingredients) and the old VAT legislation which was established against the backdrop of less healthy ingredients and the principle of ‘non essentials’ being taxed.

This leads to illogical outcomes in VAT appeals and guidance, producing counter-intuitive results – healthy snacking products can be subject to VAT whilst a less healthy cake with a high fat and sugar content is zero rated.

Why is VAT on drinks Important to Manufacturers?

Most businesses manufacturing food and beverage products will ultimately want to see these on the shelves of High Street retailers, this being the Holy Grail to reaching a mass market and selling significant volumes of a product. This is a hugely competitive marketplace and in order to gain agreement from the buying team at a large supermarket that they will stock the product, the supermarket must be able to recognise the product will compete well and be attractive in terms of pricing to the consumer.

With a VAT rate of 20%, there will clearly be a material impact upon pricing and the ability of a product to perform alongside similar products that may have a different VAT rate.

Leading on from above, as the marketplace for such products is ultimately B2C, having to account for 20% VAT on drinks products versus it being zero rated impacts on its ability to be competitive and ultimately the viability of the product can be at risk.

One of the other key areas relates to the ultimate sale of the business – where a manufacturer has a product and may look to sell the business in future or may need to seek additional funding for expansion of the business, any due diligence exercise carried out is likely to look closely at the VAT liability of products falling into the grey areas outlined above. Any uncertainty around the VAT rate applicable to the product could have a material impact upon the value of the business and its risk profile.

It is important that the business is able to demonstrate that VAT on drinks is being applied is correctly. Unless the VAT treatment is clear cut, it is highly recommended businesses obtain written rulings from HMRC that zero rate of VAT on drinks can apply if they believe this may be the case. Such a ruling can significantly add value to a business because it removes the risk from any potential purchaser or funder of the VAT standard rate being found to be due from any revenues.

Equally, if the business is currently standard rating VAT on drinks that should be zero rated, an opportunity is being missed, because the bottom line is being understated to the tune of the 20% VAT amount. The reverse is also true of course because the bottom line is being overstated by 20% in situations where the zero rate is incorrectly being applied.

HMRC’s View

As set out above, HMRC continue to be very litigious in this area and have had some degree of success against the backdrop of the existing archaic legislation. This has led to decisions that appear at odds with the general trend towards encouraging healthy eating and tackling obesity within the population at large.

VAT Notice

VAT Notice 701/14 outlines HMRC’s policy.

Current Topical Issues with VAT and Food

The following products have been litigated recently or currently, giving an idea of areas being challenged:

Turmeric shots – are they standard rated beverages?

Contact

To speak to one of our VAT specialists about VAT on drinks or any other VAT matter call Solve VAT experts on 0161 883 2120