Some supplies are regarded as taxable for the purposes of value added tax (VAT) but are zero rated. Although no VAT is charged on the sale, the supplier still has the right to recover the VAT incurred on purchases and other expenses relating to the sale. Certainty about what items are zero rated is therefore important for the vendor as well as the customer and it is vital to distinguish between sales that are eligible for zero rating and those that are not.
Food is zero rated for VAT, though there are numerous exceptions to the basic rule. The zero rating also covers animal feed (excluding pet food), seeds of food-producing plants and live animals of a type normally used to produce food.
The zero rating for food does not include many items of confectionery, alcoholic drinks and most other types of drink; however milk, tea, cocoa and coffee are specifically zero rated in the VAT law. As might be expected, there have been numerous disputes in Tribunals about what precisely is the distinction between food and confectionery.
Cakes and biscuits are zero rated, but if a biscuit is wholly or partly covered with chocolate it is subject to VAT at the standard rate. Other types of biscuit, including biscuits coated with caramel, icing or some other substance not similar to chocolate, are zero rated. Cakes that are zero rated for VAT purposes include sponge cakes, pastries, éclairs, flapjacks and marshmallow teacakes.
A well-known dispute concerned jaffa cakes, which have a layer of chocolate so their treatment for VAT purposes depends on whether they are defined as cakes (and therefore zero rated) or biscuits, in which case they would be subject to VAT at the standard rate because they have a layer of chocolate. The decision was that they are cakes and therefore zero rated.
The zero rating also applies to nuts when sold in their shell, but if they are taken out of the shell and sold salted or roasted then the price is subject to VAT at the standard rate.
Although food is zero rated, supplies of catering services are subject to VAT at the standard rate. The definition of catering in the VAT law includes food that is sold for consumption on the premises where it is sold. The premises of a restaurant would include any chairs and tables on the pavement outside. In the case of a retail outlet in a shopping centre, the premises for the purposes of the VAT law can be more difficult to define.
Zero rating also applies to cold takeaway food, while hot takeaway food is a catering supply charged at the standard rate. The definition of hot takeaway food has been particularly difficult in practice. HMRC distinguish between food sold specifically for consumption while still hot and food that is warm because it is freshly baked but is not intended to be eaten while hot.
In a case that reached the Court of Appeal, pies that were baked on the premises and sold while still hot were held to be zero rated as food rather than a standard rated catering supply. The objective of the vendor was to provide freshly baked pies but they were not kept hot or re-heated before sale, and not all customers bought the pies for immediate consumption.
Likewise a Tribunal decided that chickens cooked on the premises and then kept warm were sold as food rather than catering and the sale was therefore zero rated. The chickens were kept hot so as to comply with food safety regulations rather than to enable the customers to eat them while they were still hot.
In a Tribunal decision relating to a vendor of pizzas, however, the sale of the pizzas was found to be a supply of catering, chargeable to VAT at the standard rate. After being baked, the pizzas were kept hot and delivered as soon as possible. The company’s marketing literature advertised the pizzas as piping hot, so the intention was to sell hot takeaway food.
Zero rating for live animals and animal feed
Zero rating applies to the sale of live animals of a kind “generally used as yielding or producing human food”. This definition therefore covers animals that are normally slaughtered for food and those kept for their milk.
The zero rating for animal feed does not extend to sales of pet food, food for birds (other than poultry or game) or biscuits and meal for cats and dogs. Generally the distinction between zero rated animal feed and standard rated pet food is clear, but there can be disputes around what food is suitable for working dogs, for example, as opposed to dogs kept as pets.
Food packaging and zero rating
Where the food packaging is intended to protect, contain and promote the food inside it, the packaging is considered to be part of the same supply for VAT purposes and is charged at the same rate of VAT that applies to the food. However where the container is more than just a container and has value in its own right, VAT must be accounted for on the container as a separate supply.
For example, a container that is intended for more permanent use as a storage jar or tumbler or is advertised as having value as a separate item is subject to VAT as a separate supply. A hamper or picnic basket containing food would also be regarded as a supply in its own right. However elaborate seasonal packaging at Christmas would not be considered a separate supply just because it is more elaborate than would be the case at other times of the year.
Sources:
HM Revenue and Customs www.hmrc.gov.uk
HMRC Notice 701/14 – Food
HMRC Notice 709/1 – Catering and takeaway food
“Value Added Tax” by Andrew Needham and Steve Allen, Bloomsbury Professional, 2009