I monitored the 'Flat Rate Scheme' with all my clients and each time it was better until they bought some capital item. Each time it was worse. This was before the days of AIA at 100%. I would consider using it though, if the records weren't good enough. A decent till should have a key for different VAT rates, but that's not easy to monitor when the rate changes 3 times 2 years. My experience. Others may think differently.
Hi. This is, as you say, a pretty grey area. HMRC website has quite a lot of information and a good place to start is here http://www.hmrc.gov.uk/vat/managing/charging/charging.htm
A lot depends on what they are selling, whether there is waiter/waitress service, is it all in house or takeaway, is the food prepared in house or bought in etc.
As Don Tax says above, flat rate scheme may be the answer as it takes the hassle out of VAT but if the majority of the supplies are zero rated, you could be paying more than you need. I would suggest that you need to have a good look at what they sell, the VAT rate per item and make a rough calculation.
From what I have seen, all food eaten inhouse in a cafe or restaurant (with the exception of schools, hospital canteens etc) is subject to the catering rules and is subject to VAT (see HMRC notice 709/1, point 1 will take you through the catering guidelines). Be careful of flat rate on these occasions as the majority of your food purchases will be zero rated, you could well be worse off on the flat rate scheme.
I have just taken on a bakery that does hot food for lunches, and found notice 709/1 helpful. Basically if food is prepared and served hot, it is liable to VAT. For example, if the cafe sells a cold sausage roll to take out, no vat, but if it is heated up and sold to take out, VAT has to be added.
Most cold foodstuffs are not subject to VAT if taken out, sandwiches, cakes, some buns, some biscuits and drinks, but the take out area is a bit of a minefield and you need to be careful with the products sold in the take out as the HMRC VAT rules do not always make sense.
For further guidance on take out food, see notice 701/14 for a more detailed description and breakdown of categories. As I said, the rules are a minefield, for example, ice cream is SR, frozen youghert is not, teacakes with a biscuit base are ZR, whilst snowballs are classed as confectionary and are subject to VAT! Don't ask me who makes this stuff up and where the logic is, unfortunately this is the what you have to work with when dealing with food. You will have to go through the takeout menu and check each group of items within this notice and see what VAT rate to apply.
A few weeks ago I had to write up a VAT summary for a client of ours who was opening a cafe - it was such a nightmare!! In the end it was established that;
- Any food/drink consumed on the premises is standard rated
- Any food/drink supplied with the intention of being eaten hot away from the premises is standard rated (be careful, as food that may happen to be warm because it is cooked fresh does not necessarily mean it has the intention of being eaten hot)
- Any food/drinks supplied with the intention of being eaten cold away from the premises is zero rated, unless they are usually always standard rated such as sweets or bottled water.
What sort of things will you be selling? Sometimes it can be very item specific!!
On balance I would say keep it simple and use the Flat Rate Scheme at 12 1/2%. No question it's easiest option accounting wise to work with, and admin. wise for the owner and staff to operate in the long term. The whole area of cafe food is a b***** minefield but what's different!
