Confusion over zero-rated foods for VAT

Between July 2021 and March 2022, the government reduced VAT rates for tourism and hospitality businesses to help these industries recover from the impact of the COVID-19 pandemic.

However, as of 1st April 2022, the standard VAT rate is back to normal. This means that if you’re selling food and drinks that aren’t zero-rated, you’ll have to pay 20% VAT on those products.

Unfortunately, when it comes to baked goods and confectionery, it can be difficult to distinguish between zero-rated food and standard-rated food. Everyone knows the common argument over whether Jaffa Cakes count as a biscuit or a cake – which are both taxed differently.

Complying with arbitrary food VAT regulations can feel like navigating a minefield. So, how do you stay on HMRC’s good side while saving your business money and making your customers happy? Let’s investigate which foods can be zero-rated and when you have to pay standard-rated VAT.

Which foods are standard-rated for VAT?

Generally, the standard VAT rate applies to food and drink served hot as part of a catering service. If you’re a retailer selling cold consumables to take away, these will be zero-rated.

However, any ‘eat-in’ products count as a catering sale. So, if you sell cold meals or drinks that customers consume on your premises – with or without hot products – then the otherwise exempt cold items will also be liable for standard VAT.

Though these categorisations widely apply, there are quite a few exceptions. For example, most cold drinks are standard-rated, but HMRC specifies that takeaway iced coffee, iced tea, and milkshakes are zero-rated (though ice cream, which many milkshakes contain, isn’t).

Similarly, certain cakes and desserts are zero-rated, as are vegetable-based snacks. Yet savoury snacks like potato crisps, popcorn, nuts, and confectionery all fall under the standard rating.

When tap water is exempt but bottled water isn’t, and, how are businesses supposed to stay on top of charging the right prices to pay the right VAT rates?

How does VAT apply to baked goods?

One of the biggest sources of confusion for sellers of food and drink is the murky area of baked goods and confectioneries. The VAT rating of a sweet snack can hinge on whether it includes chocolate, which is standard-rated, while biscuits with any other coating are zero-rated.

Most confectionery will be given a standard VAT rating, while the rating of most baked goods will depend on whether they’re sold hot and/or eaten on the premises. For example, a cold takeaway pastry (such as a croissant) would be exempt, while a hot pasty would be eligible for full VAT.

Any sweetened food item usually eaten with the fingers counts as confectionery, such as chocolates, candies, and cereal bars. There are very specific instances where similar items and ingredients are rated differently. For example, sweets, gum, and dried fruits for snacking are classed as standard-rated, but candied fruits and chocolate pieces or spreads used for baking are exempt.

To make things even more confusing, you need to ‘apportion’ your sales of goods with mixed ratings. If customers buy cold takeaway food but consume it on your premises anyway, you must keep adequate records to calculate the appropriate VAT liability for this percentage of sales.

What if you sell a product that contains both zero-rated food and standard-rated food at the same time? This counts as mixed supplies, in which case the whole item is likely to be standard-rated. However, if you sell hot and cold items together in a package for consumption off the premises, only the hot portion is liable for VAT – so you’ll have to calculate that amount accordingly.

What happens if HMRC disagrees with your VAT rating?

Producers, manufacturers, wholesalers, and retailers alike should be wary of ignoring government guidance on VAT for food and drinks. If your own estimates don’t align with HMRC’s definitions, you could be looking at a tribunal case and paying a fine – or even going out of business completely.

Take these two cases as a warning. First, Glanbia Milk produced low-calorie flapjacks with less sugar and fat but more protein than traditional flapjacks. HMRC argued that their product was not a zero-rated cake like regular flapjacks, but rather a standard-rated confectionery, and the tribunal agreed.

Second, in a similar case, start-up DuelFuel may end up closing down. HMRC does not consider their range of protein cake bars and flapjacks to be traditional cakes based on the ingredients, texture, and marketing. Therefore the company will have to pay the 20% standard rate instead of zero VAT.

If a flapjack crosses into cereal bar territory, HMRC has proven that they won’t show any leniency. This is why it’s so important to pay attention to even marginal differences between the way you categorise your own products and HMRC’s definitions – which you can find in VAT Notice 701/14.

Should your business need help with reviewing your sales systems and VAT liability, the financial consultants at GBAC, accountants in Barnsley, would be glad to assist you. Call us on 01226 298 298 to discuss tax advice, or email your enquiries to info@gbac.co.uk. We’ll be happy to arrange a VAT consultation with you.