The Chancellor announced a temporary reduction in the VAT rate on food, drink and hospitality venues from 20% to 5%. The original expiry date for the reduction was January 2021 however, it has now been extended to 31st March 2021. Whilst his sweeping statement was very exciting the detailed information isn't quite a simple and generous as it first seems.
In respect of food and drink:
In order to apply the rate of 5% the food or drink must:
1 - Not be alcoholic
2 - Must be served to eat /drink on the premises.
3 - If taken away must be hot
4- Purchasable separately at the establishment for the same price if not purchased with an alcoholic drink
If the rules above do not meet the criteria then the normal VAT rate of 20% or 5% applies.
We have had many queries in respect of the VAT rate of a non alcoholic mixer served with an alcoholic measure. This area has currently not been adequately provided guidance upon and different VAT officers have different interpretations. However our current guidance is that for the mixer to be 5% it must:
1 - Be subject to it's own separable price charge
2 - Be optional for purchase and not dependent upon purchase of an alcoholic purchase
3 - A separate line on the till/receipt system
4 - Not be advertised as a joined up product. So for instance if advertised as a gin and tonic for £5 then this is joined up and vat is due at 20% on the entire drink, gin and the tonic water.
No guidance has been issued on this in respect of the drinks being served in the same glass as an alcoholic measure. All advice above is best interpretation upon information issued at present.
We have also had certain queries about whether businesses are able to increase prices on soft drinks and reduce prices of alcoholic drinks. Whilst there is no law in England on the minimum price per unit for alcohol, there is anti avoidance laws on value shifting. Value shifting legislation applies to charge VAT at 20% on a business that shifts the value of a sale from a product at a higher VAT rate to a connected product at a lower VAT rate without legitimate business reasons.
So for instance:
- if you used to charge £4 for a measure of vodka and £1 for a dash of coke before the VAT rate change the total VAT would have been 83p.
- If you kept the pricing structure the same when the 5% rules came in then potentially the VAT would reduce as only VAT would be payable on the vodka so VAT = 66p
- however if you shifted the value of the transaction so that if you purchased a dash of coke for £4 you received a discounted vodka measure for £1 then your VAT would be 16p
The legislation would catch out the businesses with the tests applied (we won't list them all out) but we believe it would be summarised that the price change was clearly implemented for no other reason than the reduce the amount of VAT payable on the transaction.
Hotels and attractions:
VAT on hotels and attractions has also been reduced to 5% however the rules on alcohol must be followed the same as above. Detailed guidance can be found here:
Flat rate scheme:
If you are operating in one of the above industries and are using the flat rate scheme then certain % rates have changed. You can find updated % amounts here: