Here, we explore the VAT implications of a restaurant providing delivered takeaways.
The following scenario is relevant to many hospitality businesses and demonstrates the complexity of VAT and the need to take specialist advice.
A client has several eat-in dessert parlours that have been closed since March due to the coronavirus pandemic. Like many others in the restaurant/catering sector, the client has changed their business model, and is now providing a delivery-only takeaway service. What are the VAT considerations?
Customers order from a limited menu including warm crepes and waffles served with cream or chocolate sauce, ice cream tubs, a selection of cream cakes, hot drinks and milkshakes. The crepes and waffles are best eaten hot and are delivered in heat retaining packaging. They charge a flat £5 delivery fee for each order. Before the pandemic, the client accounted for VAT at the standard rate of 20% on all sales.
Keep the change?
Since providing the delivery-only service many customers making payment with cash do not want their change. How should the retained change be treated for VAT?
All supplies of desserts and drinks for consumption on the premises are treated as supplies of catering which is a standard rated supply. Dine-in supplies are seen to have a significant element of service, rather than merely a supply of food.
Now that the supplies are mainly takeaway desserts and drinks, consideration has to be given as to whether the supplies still fall within the definition of standard rated catering. If there is no supply of catering, the applicable VAT rate will be based on the liability of the food item itself.
The liability of the specific products is as follow:
Warm Crepes and Waffles – the supply of ready to eat hot food is catering – therefore the supply of the waffle /crepe and its toppings with be standard rated.
Ice Cream Tubs – Ice cream is standard rated. It is one of the food items excluded from zero rating.
Hot Drinks – as with hot food these are supplies of catering and standard rated.
Cream Cakes – are zero rated food when not supplied in the course of catering
Milkshakes – are zero rated provided they are predominantly milk based – if not then these will be standard rated.
Where an order consists of both standard and zero-rated items, not specifically intended to be eaten together (unlike the cream or chocolate sauce provided with the hot waffle) there will be a mixed supply. VAT is accounted for on the value of the standard rated items.
The delivery charge for a supply of delivered goods follows the liability of the goods supplied. If the order is for mixed liability supplies as above, the delivery charge is apportioned between the standard and zero-rated items.
Provided it is made clear that there is no obligation for the customers to pay any additional service charge or amount, any amount given by the customer over and above the agreed charges for food and delivery is treated in the same way as a freely given gratuity or tip, which are outside the scope for VAT purposes, as they are not seen to be consideration for any supply of goods or service[1]
Reproduced from Croner Taxwise