Managing VAT in the hospitality business.

It’s important for every business to manage their VAT responsibilities, but this can be especially true if your business is in the hospitality industry, as VAT liabilities can really creep up if you don’t stay on top of your finances.

Every VAT registered business has to collect VAT on behalf of HMRC. This is important to remember, the business is just collecting the tax on behalf od HMRC, the money collected never belongs to the business and must be paid to HMRC periodically. To minimise the impact of large sums of money leaving your bank account there are a few things you can do it prepare and be aware of to mean its less of a shock when you have to pay.

Firstly, if you’re primarily a food business like a restaurant of cafe, you’ll need to accept that you won’t be able to claim back VAT on many of your ingredients as they will be zero rated when they come to you. However, most of your menu prices will have VAT added at standard rate (20%). This means that all the meat, fish, cheese, coffee that you purchase will have no VAT, so nothing you can claim back, but when you turn it into a dish on your menu you have to add 20% to the price. So make sure you price your dish to cover costs and make some profit and then add 20% on top of that.

All of the above means that you’ll be accumulating a VAT liability over the course of the year, so how do you keep on top of this?

Good financial reporting will allow you to know at any given time what your VAT liability is, giving you time to prepare before you have to pay it.

A good thing to do is set up another bank account to hold the VAT you have collected. Alternatively, banks like Monzo allow you to have separate ‘pots’, and at the end of each week you can transfer the VAT you owe for that week into the VAT pot. That way, when the time comes to pay your VAT bill, you have all the money you collected and it won’t be a major shock for you or blow to your bank balance.

You could also put it in some kind of easy access savings account and try and make some money via interest on this account, although you will have to include that interest as earnings when you submit your tax return.

Sadly there’s no way to avoid VAT and be suspicious of anyone who says they can drastically reduce your VAT bill. VAT is what it is and cannot be legally manipulated, although do make sure you’re clear on what your responsibilities are and what you can claim back so that you’re not paying too much or too little (which will come back to haunt you later).

This is where a good bookkeeper can help.