VAT on eat-in and takeaway food

The three tests

Most food is zero-rated for VAT, but VAT Notice 709/1 sets out three ways a sale becomes standard-rated at 20%. A sale is "in the course of catering", and standard-rated, if it is:

• catering in the ordinary meaning, which the notice describes as prepared food and drink supplied with "a significant element of service": meals in restaurants, cafés and canteens, catering for events, and delivery of cooked ready-to-eat food
• food and drink for consumption on the premises
• hot takeaway food or drink

A sale that meets none of the three follows the general food rules in VAT Notice 701/14. Most cold food is zero-rated, but some items are always standard-rated. Notice 709/1 names "potato crisps, sweets and some beverages including bottled water". Hot drinks are always standard-rated.

What counts as your premises

Section 3.1 of the notice says: "You must always charge VAT at the standard rate if you make a supply of food and drink for consumption on the premises". Premises are the areas the food business occupies and "any area set aside for the consumption of food by the food retailers' customers", even where customers of other food businesses use the same area.

What counts as your premises

Type of business	Premises for VAT
Restaurant, café or canteen	The whole restaurant area, and tables and chairs on the pavement, concourse or similar areas next to it
Outlet in a shopping centre	The outlet, seating in areas that belong to it or are for its exclusive use, and tables and chairs in food courts shared with other food businesses
Outlet on the high street	The outlet and any tables and chairs outside provided for its customers
Stall in a stadium, park or pay-entry venue	The stall and any facilities next to it provided for its customers

Seating provided for the general public is outside the definition. The notice's examples are shopping centre benches meant for resting or waiting, public picnic areas that the business does not regularly clean and clear, and seating in airport lounges and railway stations.

Hot takeaway food

Takeaway food or drink is standard-rated if it is hot when you hand it over and it meets at least one of five tests. Hot means "at a temperature above 'the ambient air temperature'". The five tests are that the food or drink has been:

1. heated so that it can be eaten hot, judged by the seller's purpose: chips, pizzas, pies, hot soup, tea and coffee
2. heated to order: toasted sandwiches, paninis, garlic bread
3. kept hot after heating, in a heated cabinet, under heat lamps, on a hot shelf or in hot water
4. handed over in packaging that keeps heat in, such as foil-lined bags, insulated containers and pizza boxes
5. advertised or marketed as hot. Marketing it as "freshly baked" does not count.

Food that is warm only because it has just come out of the oven, and that meets none of the tests, stays zero-rated. The notice's example is a pasty baked and left to cool naturally, sold in a plain paper bag and advertised as freshly baked. If the same pasties go under heat lamps, or are advertised as hot, they become standard-rated.

A microwave left out for customers to heat their food makes the sale a supply of hot food, whether or not you charge for using it (section 4.5). A single item with hot and cold parts, such as a bacon sandwich, a burger or a baked potato with a cold filling, is standard-rated as a whole (section 4.6).

Cold takeaway food and drink

Cold food sold to take away is zero-rated unless it is a type that is always standard-rated. Grocery items sold in the same form as a supermarket sells them, such as packets of tea, coffee beans, loaves and sealed cartons of milk, follow the general food rules when they are not for eating on the premises (section 2.2.3).

The same counter, six sales

• Cold sandwich eaten at your tables, £6.00VAT £1.00
• Cold sandwich taken away, £6.00VAT £0.00
• Hot toastie taken away, £6.00VAT £1.00
• Coffee taken away, £3.00VAT £0.50
• Bag of crisps taken away, £1.20VAT £0.20
• Bottle of water taken away, £1.20VAT £0.20

Meal deals and mixed sales

Where standard-rated and zero-rated items are sold together for one price to take away, you work out the value of each item and charge VAT on the standard-rated part (section 4.7). The apportionment can be based on cost or on market value, as VAT Notice 700 explains. The notice treats a package as a mixed supply where each item in it can also be bought separately from your menu. Free condiments such as salt, pepper, vinegar and mustard are ignored (section 4.8).

A £6.00 takeaway meal deal of a cold sandwich and a coffee

• Sandwich bought on its own, zero-rated£4.50
• Coffee bought on its own, standard-rated£3.00
• Sandwich share of the deal: £6.00 × 4.50 ÷ 7.50£3.60
• Coffee share of the deal: £6.00 × 3.00 ÷ 7.50£2.40
• VAT on the deal: one-sixth of £2.40£0.40

Splitting eat-in and takeaway sales

A café or sandwich shop that sells cold food both to eat in and to take away must split those sales: standard-rated when eaten on the premises, zero-rated when taken away (section 3.3). The till can record this at the point of sale, with an eat-in and a takeaway key for each item and staff who ask each customer. Where the liability cannot be recorded at the point of sale, the notice says you "must keep satisfactory evidence to support a fair and reasonable apportionment". Retail schemes, including a catering adaptation, are in VAT Notice 727 (section 5.6).

A quarter's cold food sales of £30,000 including VAT

• Rung through the till as eaten in£9,000.00
• VAT on the eat-in sales: one-sixth£1,500.00
• Rung through the till as taken away£21,000.00
• VAT on the takeaway sales£0.00
• VAT if all £30,000 had been treated as eaten in£5,000.00

Delivery, events and meals for staff

Delivering cooked, ready-to-eat food or meals is catering and is standard-rated, with or without crockery or cutlery (section 2.1). Food the customer has to prepare before eating, which includes thawing, cooking and reheating, is not catering (section 2.2.1). Food and drink supplied under a contract to cater for an event is standard-rated in full (section 2.2.2).

Free meals or drinks given to customers or friends are business entertainment, and the VAT on them cannot be reclaimed (section 5.7). Free mints or liqueurs served with a meal the customer pays for count as part of that meal. Meals given to coach drivers or party organisers in return for bringing groups are treated differently: you can reclaim the VAT, but you account for output tax on what the meals cost you.

Meals the owner and family eat from their own restaurant are not catering, but VAT is due on the full cost of any standard-rated stock taken for them, such as ice cream, crisps, sweets, and soft and alcoholic drinks (section 5.8). Free meals for employees carry no VAT, and neither do meals paid for through deductions from gross wages where the contract of employment provides for them.

Common mistakes and what HMRC does

• One till key for every sale, so cold food eaten in goes through as zero-rated takeaway.
• Pavement tables treated as outside the premises. Tables and chairs next to a restaurant are part of it.
• Pies or pastries kept in a heated cabinet sold as zero-rated. Keeping food hot after heating meets the third test.
• Takeaway packaging, menus or delivery listings that describe food as hot.
• A microwave for customers, with the food still sold as cold.
• Meal deals with all the VAT put on one item, or with none charged.

An error you find yourself can be corrected on your next VAT return if its net value is £10,000 or less, or up to £50,000 where it is no more than 1% of the box 6 figure on that return. Larger errors, and any deliberate error, are reported to HMRC separately. The time limit for correcting errors is four years, and it does not apply to deliberate errors (VAT Notice 700/45). Where HMRC finds the error, it assesses the VAT, and a penalty for an inaccurate return can be added: up to 30% of the extra tax where reasonable care was not taken, and up to 70% or 100% where the error was deliberate.

Records and deadlines

• VAT records kept for at least 6 years (VAT Notice 700/21).
• Till reports showing eat-in and takeaway totals for each VAT period, and any evidence used to apportion cold food sales.
• For each meal deal, the separate menu prices or costs used to split the price.
• VAT return and payment due one calendar month and 7 days after the end of each VAT period.
• Late returns earn penalty points, with a £200 penalty at the threshold: 4 points for quarterly returns, 2 for annual and 5 for monthly.
• Late payment: 3% of the VAT unpaid at day 15, a further 3% of what is still unpaid at day 30, and a daily penalty at 10% a year from day 31.

How we help

We set the VAT codes in your till and in Xero so that each item has an eat-in and a takeaway rate, check the split and the meal deals each quarter, and file the return. Try the eat-in and takeaway VAT calculator, or see accounts and VAT.