Running a restaurant may seem like it is all about serving a great menu and providing excellent service, but in reality, there is much more to it. VAT is one of the financial responsibilities for restaurant owners that can become particularly complicated because the VAT treatment of food and drink can depend on what is sold, how it is sold, and where it is consumed.
If you run a restaurant, you might assume that food is either VAT-free or taxed at 20%. In reality, it’s completely different, and getting it wrong can cost you.
Whether you’re running a restaurant, cafe, takeaway, catering business, or a food business selling through multiple channels, getting to grips with VAT rules matters. It affects how you price your menu, how well your records hold up, and whether you face tax or legal compliance problems in the future.
In this guide, Shreem Accountants explains the key UK restaurant VAT rules, including the VAT registration threshold, eat-in and takeaway food, hot takeaway sales, alcohol and drinks, delivery and catering, input VAT, VAT calculations and common mistakes.
A quick note: VAT treatment can depend on the precise nature of a supply. The examples in this guide are general guidance and should not replace professional advice on a specific transaction.
What Is VAT?
VAT stands for Value Added Tax, which is charged on most goods and services supplied by businesses registered for VAT.
The current standard VAT rate for the UK is 20%. There are also reduced-rate and zero-rated supplies, but the rate applicable to a restaurant transaction depends particularly on the goods or services which are being supplied.
For restaurants, this becomes more complicated because a business may sell several different types of products and services, such as:
- Meals eaten on the premises
- Hot takeaway food
- Cold takeaway food
- Alcohol
- Soft drinks
- Catering services
- Food delivered to customers
- Private-event catering
The important point is that VAT should be determined by the nature of food and drink, and where it is being consumed.
When Does a UK Restaurant Need to Register for VAT?
A business generally has to register for VAT when its taxable turnover for the previous 12 months exceeds £90,000.
After the business has passed the £90,000 threshold, it needs to register by the end of the month in which the threshold is crossed. Businesses can also choose to register voluntarily below the threshold. The £90,000 figure is therefore an important number for restaurant owners to monitor.
Here’s an example to understand when to register for VAT: Let’s say XYZ is a restaurant based in the UK, with a taxable turnover of £86,000 at the end of September. By October 20, it makes another £5,000, taking its rolling 12-month taxable turnover to £91,000.
Because the restaurant has exceeded the £90,000 VAT registration threshold on October 20, it must notify HMRC within 30 days of the end of October, by 30 November. Its effective VAT registration date would generally be 1 December.
A key point owners often miss: This is not based on your VAT registration year or your accounting year. It’s a rolling 12-month check, recalculated every single month. A restaurant can cross the threshold in its fourth month of trading just as easily as its fortieth, so you need to monitor turnover monthly, not just once a year at accounts time.
Should you register early anyway?
You don’t have to wait until you hit the threshold. Some restaurants register voluntarily, before they’re required to. Let’s say you are opening a new restaurant and you’ve just spent a fortune on kitchen equipment and a refurb, all with VAT on top. If you’re registered from day one, you can claim VAT back.
But it’s not right for everyone. Once registered, you have to charge VAT on everything that applies, including to everyday customers who can’t claim it back. If you’re a small cafe serving walk-in customers for coffee and sandwiches, registering early usually just means higher prices and lower margins.
So, if your customers can usually reclaim VAT themselves, or you’re spending heavily upfront, registering early can pay off. If you’re a small, walk-in restaurant, it’s often better to wait.
What VAT Rate Applies to Restaurant Food?
This is probably the most confusing and attention-needed area for restaurant owners because the same food can sometimes be zero-rated and could be standard-rated.
Food and drink served for consumption on restaurant premises or in designated communal eating areas is generally standard-rated. Hot takeaway food is also generally standard-rated. However, some cold takeaway food and certain food supplied for outside catering may qualify for zero-rating, depending on the specific VAT rules.
Confusing right?
It might help you a bit to understand:
There are specific rules and exceptions for different food and drink products, which means restaurants should avoid applying one VAT rate to everything on the menu
Eat-In Restaurant Meals and VAT
A customer walks into your restaurant, sits down and orders a main course, dessert and a soft drink. Because the food and drinks are being supplied as part of restaurant catering, they will generally be subject to the standard VAT treatment.
This may sound simple, but think about how many transactions a busy restaurant processes every month. If the wrong VAT code is assigned to one menu item in your EPOS system, that mistake can potentially be repeated hundreds or thousands of times. That is why a VAT decision made when setting up a menu item can affect your records long after the menu has been printed.
Takeaway Food
There are common misconceptions about restaurant VAT that takeaway foods are VAT-free.
You cannot simply label everything sold as takeaway as zero-rated.
HMRC generally treats hot takeaway food as standard-rated, while certain cold takeaway food may qualify for zero-rating when the relevant conditions are met. However, it is important that you should not rely on a simple “hot means 20% and cold means 0%” rule.
Hot Takeaway Food and VAT
Hot takeaway food is generally standard-rated. Simply taking food away rather than eating it inside the restaurant does not automatically make it zero-rated. This can include prepared foods such as:
- Hot pizza
- Hot burgers
- Hot curries
- Hot pies
- Other prepared hot meals
Cold Takeaway Food
Certain cold takeaway foods may qualify for zero-rating when they are not supplied in the course of catering, such as a cold sandwich, a salad, or a cold sausage roll. But again, cold does not automatically mean zero-rated. There are exceptions covering products such as: Confectionery, Ice cream, Alcoholic drinks, Certain beverages, and other specified food products.
For example, two cold items sold from the same takeaway counter could potentially have different VAT treatments. This is why it is better to look at what the actual product is and how it is being supplied, rather than simply applying a 0% VAT code to everything that is cold.
What Happens When a Customer Orders Both Hot and Cold Food?
Restaurant VAT can become more complicated when a customer orders different types of food in the same transaction. Food and drink eaten on restaurant premises or in a designated communal eating area is subject to VAT. Hot takeaway food and home deliveries are also subject to VAT, while qualifying cold takeaway food is generally zero-rated unless it is intended to be eaten in a designated eating area.
For example: A customer orders a hot chicken wrap for £8 and a qualifying cold sandwich for £5 to take away. The hot wrap would generally be standard-rated, while the qualifying cold sandwich may be zero-rated. Even though both items are on the same receipt, the restaurant should apply the appropriate VAT treatment to each item rather than using one VAT rate for the whole order.
What if there is a discount and meal deal?
Suppose a restaurant offers several items together as a meal deal for one price. If those items would normally have different VAT treatments, the restaurant may need to split the single meal-deal price between the individual items before calculating the VAT.
In simple terms, the discounted price is divided between the products according to an appropriate method, and the correct VAT treatment is then applied to each portion.
Therefore, one customer + single order is not necessarily equal to one VAT rate.
Delivery and Third-Party Platforms
Delivered food generally follows the VAT rules that apply to the underlying food and supply. For example, hot delivered meals are generally standard-rated, while certain cold food items may qualify for zero-rating, subject to the relevant exceptions.
The accounting can become more complicated when a delivery platform is involved. If a platform takes a commission before paying the restaurant, the amount received in the bank is not necessarily the restaurant’s gross sales figure. The restaurant should reconcile the full order value with the platform’s fees, VAT, refunds and discounts. It is also important to check the agreement with each platform, as the VAT treatment can depend on whether the platform is acting as an agent or supplying the food itself.
Catering and Private Events
UK restaurants often provide food for weddings, parties, corporate events and private functions beyond their premises. These supplies generally fall within the catering rules and are usually standard-rated, but the exact VAT treatment depends on what is being supplied and the circumstances.
It is important to check the VAT position before agreeing to prices if planning for larger catering or private-event contracts. This can help avoid a situation where VAT has to be paid from the restaurant’s margin because you did not consider the VAT when the price was set
Can you reclaim VAT?
Yes, once you are registered for VAT, you can simply reclaim VAT on the eligible costs such as equipment, professional services, software, repairs, utilities, and more if you have proper invoices and records. But remember that not every expense with VAT on it is reclaimable.
Few Things Where Restaurants Possibly Can Go Wrong
- Not regularly monitoring the turnover monthly
- Treating meal deals as a single VAT category when they contain different-rated items
- Automatically considering takeaway food as zero-rated
- Assuming every food item on the menu has the same VAT treatment
- Not keeping VAT invoices for business purchases
- Using the wrong VAT code when adding a new menu item
- Getting delivery platform settlements wrong by treating the net payout as the full sale value
Final Thoughts
Restaurant VAT basically is not the case of zero VAT or standard VAT. Different foods, drinks and services can have different VAT treatments depending on what is being sold and how it is supplied. For restaurant owners, the important factor is to look at each and every product and transaction carefully rather than applying one VAT rate to all. From hot takeaway meals and qualifying cold foods to meal deals, delivery orders and catering, getting the VAT treatment right can help you avoid mistakes and keep your records accurate.
If you’re unsure of your restaurant’s VAT setup, getting a headache while managing your accounts, or still confused about when to register for VAT and reclaim it, you are just a single click away from saying goodbye to your headache with Shreem Accountants.
