To VAT or not to VAT, as Shakespeare never wrote! But there’s matter of VAT on food and drink bubbling away under the surface. And it’s all down to bubble tea!
The cold drink that blends tea with milk, fruit juice, fruit and tapioca pearls is growing in popularity, according to reports. Over the past couple of years it has become a firm favourite, particularly with girls and young women between the ages of 10 to 20.
Developed in Taiwan in the 1980s, bubble tea is so popular it has its own emoji. Its hashtag on TikTok records more than 8 billion views.
But the storm brewing for bubble tea is whether the drink should attract standard-rates or zero-rates of VAT. That’s because the argument surrounds whether it is tea – which means it’s zero rate – or a soft drink, which attracts a standard rate of VAT.
Cafés and coffee shops are a growing sector in the UK and Brits bought more food and drink from a café in January 2024 than in 2019. So, if you’re thinking about setting up a takeaway food business or food manufacturing business, just what do you need to know about VAT on food and drink?
Jaffa cakes and VAT
The question around whether bubble tea should attract standard 20% VAT or zero VAT is similar to the issue surrounding cakes and biscuits. The discussion started in 1991 when McVitie’s challenged HMRC about the fact they were cakes not biscuits. Cakes attract zero VAT because they are considered a staple food. Biscuits, on the other hand, are seen as luxury items, so are standard-rate VAT items.
McVitie’s won after their lawyer pointed out that when stale jaffa cakes go hard. Biscuits go soggy!
And in 2009, M&S won its battle against HMRC who said their chocolate teacakes were biscuits. Over 20 years, the taxman had charged £3.5m in VAT stating that they were biscuits.
But after a 13-year legal fight, a court ruled that the teacake was a cake not a biscuit and M&S had been wrongly charged VAT.
VAT on food and drink
Just as cake and biscuits highlight, there are rules when it comes to food and drink and VAT. If you are not VAT registered and won’t reach the turnover threshold of £85,000, these rules don’t apply. For our deep dive about general VAT rules, read our earlier blog.
If you are VAT registered and run a food and drink business you need to know about what attracts standard 20% VAT or zero-rate VAT. This applies to all food businesses, including cafés, takeaways, bar, retailers, producers, manufacturers and wholesalers.
When working out whether to charge VAT on food and drink you need to decide:
- Should the item be charged at standard or zero rate?
- Is the food for human consumption?
- Are you supplying the food to eat in or take away?
It’s also worth checking the government’s outline on VAT on services and goods.
Which foods attract zero rate VAT?
As ever with taxation rules, you need to be quite specific before coming to answer. Zero rates apply to all unprocessed food for human consumption. This includes:
- Fruit and vegetables
- Raw meat and fish
- Culinary herbs
- Cereals, nuts and pulses
Most ingredients that are used to cook at home are zero-rated. The rules are that if the food has nutritional value they do not attract a VAT rate.
Restaurants and VAT
While supplying most of the ingredients is zero-rated, restaurants should always charge VAT at the standard rate. The rules are that anything made ‘in the course of catering’ attracts the standard-rate VAT. Catering is defined as:
- Food and drink prepared in restaurants, cafés, canteens, etc. The exception is cold food takeaway.
- Delivery of cooked ready-to-eat food
- Third party food and drink supplies (such as event caterers for conferences and weddings, for example)
- Supplying cooked and prepared food to a customer at home (hired chefs, for example)
Zero rated food that are not classed ‘in the course of catering’ include cold takeaway food, groceries and food and drink that requires further preparation by the customer.
VAT on takeaways
When it comes to takeaways, there are, again, specific rules about whether the items attract a standard or zero rate of VAT. Baker and takeaway giant Greggs famously lobbied the government when it wanted to charge standard-rate VAT on hot, fresh takeaway foods. It became known as the ‘pasty tax’.
The rule for takeaways is that the standard rate of VAT applies if:
- The food is standard-rated
- It is hot
- The food is eaten on the premises or at a designated eating area.
Zero rates of VAT apply if the food is:
- Cold
- Supplied to be eaten away from the premises
- The food is zero-rated.
What hot food and drink means
The rates on hot food and drink depend on a number of rules. These include:
- The item has been heated to be consumed hot
- It’s kept hot after being heated
- The item is heated to order
- It is advertised and marketed in a way that indicates it is supplied hot.
The basic rule of thumb is that a toasted sandwich attracts standard VAT rates of 20%, while a cold sandwich attracts the zero rate!
What should I do?
We recognise that the issue around VAT on food and drink is confusing. If you own a food and drink business and need help clarifying VAT, then contact our experienced team today.