Do you understand your business VAT?

VAT (Value Added Tax) is a tax paid by consumers when they buy goods and services from VAT registered companies. Organisations which are VAT registered must charge VAT on the products and services that they sell, but they are also able to reclaim any VAT they pay on purchases they make themselves.

As a VAT registered company you have responsibilities such as charging the correct rate of VAT on the products and services you sell, keeping accurate records of how much VAT your business pays, account for VAT on imported goods and paying HMRC the correct amount of VAT. This is only the tip of the iceberg though as the most difficult part can be keeping track of what products you have to charge VAT on, and what rate you charge at and depending on the business, it can get quite complicated.

For example, with our extensive hospitality experience we’ve got to know the VAT rules very well around cafés and coffee shops, and believe us when we tell you that it is not straightforward.

For example, take a Flat White from your local coffee shop. The price a customer pays must include VAT as all hot drinks are subject to 20% VAT. So for a Flat White that costs £3.00, fifty pence of that goes to HMRC. However, the twist here is that the ingredients of that Flat White (coffee beans and milk) are zero rated for VAT when bought by the café/coffee shop, so they can’t claim any VAT back on that.

Another example for cafés and coffee shops is with a simple sandwich. If that sandwich is consumed on the premises than the price must include VAT, but again, in most cases the ingredients of the sandwich will all be zero rated so again the café/coffee shop can’t claim any of that VAT back. If the sandwich is taken away however, then there is no VAT for the customer to pay. This is why many places have different prices for eat in and takeaway products. Just to add another little twist though, if the sandwich is toasted then the price must include VAT regardless of whether it’s eaten in or taken away.

Some products, such as fizzy drinks will have VAT in the price regardless of whether they are consumed on the premises or taken away, or whether they are hot or cold. This is nice and simple as the café/coffee shop can claim back the VAT they paid when they purchased it.

It can then get complicated as there are some strange VAT rules around some products. For example, a plain gingerbread man has no VAT. A gingerbread man with two chocolate eyes has no VAT. However, if the baker decided to give him chocolate spots for buttons then 20% VAT applies. This is more amazing than the whole jaffa cake debate to us as at some point, some people must have sat down and discussed what VAT rate to apply to a gingerbread man with chocolate buttons!

For cafés and coffee shops, a good rule to remember is that if it’s hot, the product is always standard rated for VAT and if it’s consumed on the premises it’s also always standard rated, everything else is worth checking to make sure you are charging the right amount of VAT.

All industries have their own quirks around the VAT rules so it’s important to familiarise yourself with those relevant to your business.

If you find yourself struggling to understand the VAT rules and requirements for your business then get in touch as I’m sure we can help. VAT is strictly controlled and implemented by HMRC, there are no shortcuts or workarounds and a lack of knowledge or understanding is not an accepted excuse, so fines and penalties for incorrect returns are a very real risk.

To finish, here are a few of our favourite strange VAT rules.

• Orange squash is classed as a luxury and so is standard rated at 20% VAT, whereas caviar is not and so has zero VAT.

• A physical book is exempt from VAT, but a digital version on an e-reader is not, and so has VAT applied to it.

• If you have some chocolate covered shortbread then you’ll pay 20% VAT on it, but if you have Millionaire’s shortbread then you won’t, as somehow the addition of a layer of caramel makes it zero rated.

• If a service charge is included in a bill then it’s taxed at 20%, but if a tip is offered by the customer then it’s free of VAT.

• If you buy a gerbil in a pet shop then the price will include VAT. If you buy a rabbit, then the price will not include VAT. Why? Because in the VAT rules, rabbits are classed as food.