Few areas of VAT generate more enquiries than catering. The general public assumes food is zero-rated; restaurateurs learn the hard way that this only applies to specific cold takeaway items. A coffee shop selling sandwiches, hot pastries, and beverages can be processing four different VAT treatments on a single ticket. Here is how we keep it clean.
The baseline
Most food and drink supplied in the course of catering is standard-rated at 20%. "Catering" includes:
- Eat-in food and drink at restaurants, cafes, and pubs.
- Hot takeaway food (above ambient temperature when supplied).
- Catering at events, weddings, and conferences.
- Vending machine sales in canteens.
The zero-rate exception
Cold food and drink supplied for consumption off the premises is zero-rated under Item 1 of Group 1 of Schedule 8 VATA 1994. This is why a cold tuna sandwich taken away is zero-rated, but the same sandwich toasted to order becomes standard-rated.
Some cold takeaway items remain standard-rated by exception: confectionery, crisps, ice cream, soft drinks, and bottled water. The "biscuit vs cake" line is famous (Jaffa Cakes are zero-rated cakes; chocolate digestives are standard-rated confectionery), and HMRC continues to litigate edge cases.
Hot food: the temperature test
Hot food taken away is standard-rated when, at the point of supply, it has been heated for the purpose of enabling consumption hot. A pasty straight from the oven is standard-rated. A pasty that has cooled to room temperature (and is sold as cold) reverts to zero-rated. The "hot at the time of sale" test was settled in the 2013 Pasty Tax cases, but operators still get caught.
The five tests for hot food
HMRC's published guidance applies five tests to determine standard rating of hot food:
- It has been heated for the purpose of enabling consumption hot.
- It has been heated to order.
- It is kept hot after being heated.
- It is provided to the customer in heat-retaining packaging.
- It is advertised or marketed as hot food.
If any of these is met, the supply is standard-rated. This is why a deli selling rotisserie chicken under a heat lamp cannot zero-rate it, even if the customer takes it home and lets it cool.
Practical scenarios
Cold sandwich, eat in
Standard-rated (eat-in catering).
Cold sandwich, take away
Zero-rated.
Toasted sandwich, take away
Standard-rated (heated to order).
Bag of crisps, take away
Standard-rated (specific exception).
Bottled water, take away
Standard-rated.
Tap water, take away
Outside the scope (no consideration).
Cake by the slice, eat in
Standard-rated.
Whole cake, take away
Zero-rated (cake is food, not catering).
The point of sale system
Most VAT errors in catering trace back to point-of-sale configuration. Tills that bundle all sales as standard-rated, or that fail to distinguish eat-in from takeaway at the keying stage, cost operators money or land them in audits. We work with Lightspeed, Square, and similar systems to configure correct VAT codes per item and per channel.
Flat Rate Scheme: usually wrong for catering
The Flat Rate Scheme has a 12.5% rate for catering and 14.5% for pubs. For most operators with substantial input VAT recovery (rent, utilities, food cost, equipment), the FRS yields worse cash flow than standard accounting. We rarely recommend it for catering.
Partial exemption: when accommodation enters the mix
Hotels with a bar, restaurant, and accommodation may have partial exemption issues if they also let space exempt of VAT (long-term residential, certain conferencing). Our VAT team handles partial exemption calculations and special methods where standard methods are not fair.
How we work with hospitality operators
We provide weekly bookkeeping with VAT-accurate point-of-sale reconciliation, quarterly VAT returns under Making Tax Digital, and quarterly management accounts that show food cost, drink cost, labour ratio, and contribution margin by service period. Hospitality bookkeeping is one of our largest service areas. Book a review or read our hospitality sector overview.