In its Summer Economic Statement on 8 July 2020, the government announced a number of VAT measures including a temporary reduction to the Standard Rate of VAT from 20% to 5% for the hospitality sector. This VAT cut is designed to boost customer demand in response to the economic crisis caused by the Covid-19 pandemic. In the spring 2021 Budget, the Chancellor announced a second extension to the relief: the 5% rate of VAT now applies until 31 September 2021. From 1 October 2021 the hospitality sector VAT rate is due to increase to 12.5% until to 31 March 2022, after which time it is due to return to the standard rate, currently at 20%. The scope of the reduced rate will not change.
This is great news for the hospitality sector as it reopens to the public albeit with reduced capacity. However, as with most legislative changes which are introduced quickly, this has resulted in many questions and areas requiring clarification. HMRC has now provided updated guidance for food, catering as well as the law introducing three new groups to the reduced rate. BDO has since discussed a number of points of uncertainty with HMRC and has established a number of important clarifications as explained below.
Temporary VAT rate change for food in the course of catering
VAT notice 709/1 has been updated to reflect legislative changes that temporarily introduce a 5% reduced rate on supplies of:
- Hot and cold food for consumption on the premises on which they are supplied
- Hot and cold non-alcoholic beverages for consumption on the premises on which they are supplied
- Hot takeaway food for consumption off the premises on which they are supplied
- Hot takeaway non-alcoholic beverages for consumption off the premises on which they are supplied.
However, please note that there is an exception within VAT notice 709/1 which states that:
‘any supplies of food and drink that are supplied as part of a supply of catering services for consumption off-premises remain standard rated’.
This leads on to a number of questions, the answers to which are not always easily apparent and getting it wrong may prove costly.
What is a supply of off-premises catering service?
As per HMRC’s guidance the ordinary meaning of catering includes the supply of ‘prepared food and drink with characteristics of supplying a significant element of service’. Some examples of supplies in the course of catering noted by HMRC include:
- Third party supplies of catering for events and functions, such as wedding receptions, parties or conferences
- A supply of cooking or preparation of food provided to a customer at the customer’s home, for example for a dinner party
- Delivery of cooked ready-to-eat food or meals (with or without crockery or cutlery)
- Room service in a hotel or similar establishment.
The last point may surprise many but HMRC has confirmed that room service is classified as off-premises catering and therefore does not qualify for the reduced rate. This is because only the restaurant area of the hotel is regarded as ‘premises’ for the purposes of VAT when considering catering, a guest’s room is deemed to be ‘off-premises’.
That logic can raise issues as to how takeaways in general which are delivered should be treated. However delivered (in addition to collected) takeaways do qualify for the reduced rate, unless other services are provided in addition to the food, in which case this could be standard-rated (for example, a restaurant providing a cooking service to prepare meals for a dinner party).
Defining what is off-premises catering as opposed to a takeaway or delivered food has been a niche issue in the past (typically reserved for suppliers delivering cold food) but these temporary changes expands the issue. Cases such as Value Catering Limited provided some points to consider to determine if a supply is a catering service or a supply of food including (but not limited to);
- Whether the food was made to order or merely prepared in anticipation of demand
- Whether the customer could suggest a menu
- The degree of preparation which remained to be carried out by the customer before the food could be eaten
- Whether the food was well presented and in a form where a person would ordinarily put it on the table with no further steps being taken
- Whether crockery and cutlery were provided along with the food itself or were available as an optional extra
- Whether and how and at what time the food was delivered by the supplier
- Whether a waiting service was provided by the supplier at the place of consumption, and
- Whether the food was a complete meal.
Food delivered by third parties
The increasing use of the gig economy for food delivery also raises questions about the VAT liability of charges associated with delivery services provided by a third party. In principle, delivery charges are ancillary to the supply of hot takeaway food and will follow the same liability of the primary supply (so reduced rated). However, additional charges such as commissions charged by third parties are not considered to be ancillary to a supply of hot takeaway food and will be subject to the standard rate.
Eat Out To Help Out scheme
HMRC has issued some useful guidance with examples demonstrating how VAT must be accounted for by restaurants and similar establishments using the scheme. One key issue is that the restaurant still has to account for VAT on the total selling price before the Eat Out To Help Out discount has been applied. The government reimbursement is treated as third party consideration such that VAT is due on the menu price and not the amount actually paid by the customer.
What does it mean for my business?
Determining if you supply a ‘catering service’ can be difficult and rests on the individual facts of each supply. Likewise ensuring that you account for the correct amount of VAT when participating in the Eat-Out-To-Help-Out scheme may not always be easily apparent, as HMRC accepts by issuing numerous examples in its recent guidance.
Read more on the VAT changes for accommodation and attractions.
Please feel free to contact your usual BDO contact or any BDO VAT specialist if you have any questions or queries concerning these matters.