VAT charges on food items

wibbler

Our small business recently went over the VAT threshold, but the VAT charges means we are earning less than we were below the threshold. Details below, but I wanted to check if this is correct, and if there is any way to mitigate it.

We create beautifully designed fresh food boxes for customers (grazing boxes), which include cheese, meat, brownies. The "ingredients" for the box (cheese, meat etc) are zero rated VAT, but the product we sell seems to be VAT chargeable. This means we cannot claim any VAT back, and the VAT bills every quarter are rendering our business unviable. It seems to be the case that we either have to stay under the threshold, or double our business, to make it viable.

We have a friend who makes brownies. Her ingredients are also zero-rated, but the end result (brownies) also attracts no VAT. She sends them in a box to buyers, and no VAT is attracted. But if we put her brownies in our box of food, our box *IS* VAT chargeable.

Is this correct? Any advice?

echo82

This is a very complex area, so the best advice will be ask your accountant (or failing that HMRC).

Not an area I'm an expert in, but what you've said doesn't sound right. The HMRC website gives a "food hamper" as an example of mixed supply for VAT, and what you are doing there sounds similar. Some things attract VAT and some don't, so the amount of VAT would be apportioned based on the value of the items. A zero-rated item like brownies therefore doesn't become standard rated just because you include it in the hamper.

If you look up VAT Notice 701/14 Section 6, it gives the example of a food hamper as mixed supply.

Even if all you food you include is zero-rated, I'm not sure how packaging and delivery would be handled (you may still need to charge some VAT per section 6.3 of the above), which is why it's probably best to get some professional advice as it could save you some big headaches!

DullGreyGuy

wibbler said:

This means we cannot claim any VAT back

You can reclaim all the VAT you are paying, just most your supplies are VAT 0% and so you've not paid much VAT to reclaim it. Things like your accountancy fees and packaging will have VAT and that will be recoverable.

VAT is a complex field and you should really be getting proper tax advice. Its not clear from your post if this is a mail order thing so everything is cold and eaten off premises or if you have a shop/stall and so elements are supplied hot and/or eaten on premises.

The notice above and the one it links to will give you a reasonable guidance but personally I'd rather the PI insurance of my accountant to rely on if its wrong.

MattMattMattUK

wibbler said:

Our small business recently went over the VAT threshold, but the VAT charges means we are earning less than we were below the threshold. Details below, but I wanted to check if this is correct, and if there is any way to mitigate it.

We create beautifully designed fresh food boxes for customers (grazing boxes), which include cheese, meat, brownies. The "ingredients" for the box (cheese, meat etc) are zero rated VAT, but the product we sell seems to be VAT chargeable. This means we cannot claim any VAT back, and the VAT bills every quarter are rendering our business unviable. It seems to be the case that we either have to stay under the threshold, or double our business, to make it viable.

We have a friend who makes brownies. Her ingredients are also zero-rated, but the end result (brownies) also attracts no VAT. She sends them in a box to buyers, and no VAT is attracted. But if we put her brownies in our box of food, it *IS* VAT chargeable.

Is this correct? If so, are there any loopholes? It seems very unfair.

Or you sell at a price point that makes it viable.

There are no loopholes and trying to create one is likely to land you in hot water with HMRC. 

VAT for a business is not a cost, or an income, the net impact on your business's profitability is zero. 

As others have said, speak to an accountant, make sure you get things spot on because if you end up charging less than standard 20% VAT then there would be a reasonable chance HMRC might take a more detailed interest and you would be liable for any underpaid VAT. 

wibbler

MattMattMattUK said:. 

VAT for a business is not a cost, or an income, the net impact on your business's profitability is zero. 

Thank you for your reply - but this isn't correct in our case. We are purchasing products at 0% VAT, and then (because of our success) getting charged 20% VAT on the final product. The only way to cover this is to charge 20% extra to the customer, which puts the product outside the acceptable range compared to our competitors, who are mostly under the VAT threshold.

wibbler

MattMattMattUK said:

Or you sell at a price point that makes it viable.

Which puts our prices 20% higher than most of our competitors. This is the dilemma, especially in this climate - people simply won't pay more for the same.

wibbler

echo82 said:

This is a very complex area, so the best advice will be ask your accountant (or failing that HMRC).

Not an area I'm an expert in, but what you've said doesn't sound right. The HMRC website gives a "food hamper" as an example of mixed supply for VAT, and what you are doing there sounds similar. Some things attract VAT and some don't, so the amount of VAT would be apportioned based on the value of the items. A zero-rated item like brownies therefore doesn't become standard rated just because you include it in the hamper.

If you look up VAT Notice 701/14 Section 6, it gives the example of a food hamper as mixed supply.

Even if all you food you include is zero-rated, I'm not sure how packaging and delivery would be handled (you may still need to charge some VAT per section 6.3 of the above), which is why it's probably best to get some professional advice as it could save you some big headaches!

Thank you very much, that Notice is something I will read!

We do have an accountant, and they are talking about mixed supply as an option. I just feel it's really imbalanced that things like brownies (and Jaffa Cakes!) are able to be sold 20% cheaper than a box of delicious food. 

DullGreyGuy

wibbler said:

MattMattMattUK said:

Or you sell at a price point that makes it viable.

Which puts our prices 20% higher than most of our competitors. This is the dilemma, especially in this climate - people simply won't pay more for the same.

Any company that is profitable and has hit that level of revenue has the same problem. The fact most your supplies are 0% VAT makes it slightly worse but if you were selling widgets instead of brownies you'd get the VAT back off your supplies but that will should be relatively small -v- the VAT you have to collect on your sales.  

You can speculate that its to give little businesses a bit of an advantage until they establish or because its not cost effective to manage the VAT of every single company etc but ultimately its the law and the reason for it doesnt change the outcome.

On the plus side, you can recover some VAT, try only selling VAT Exempt products and then VAT is a real stinger.

Mistral001

wibbler said:

Our small business recently went over the VAT threshold, but the VAT charges means we are earning less than we were below the threshold. Details below, but I wanted to check if this is correct, and if there is any way to mitigate it.

We create beautifully designed fresh food boxes for customers (grazing boxes), which include cheese, meat, brownies. The "ingredients" for the box (cheese, meat etc) are zero rated VAT, but the product we sell seems to be VAT chargeable. This means we cannot claim any VAT back, and the VAT bills every quarter are rendering our business unviable. It seems to be the case that we either have to stay under the threshold, or double our business, to make it viable.

We have a friend who makes brownies. Her ingredients are also zero-rated, but the end result (brownies) also attracts no VAT. She sends them in a box to buyers, and no VAT is attracted. But if we put her brownies in our box of food, our box *IS* VAT chargeable.

Is this correct? Any advice?

I thought brownies contained lots of chocolate and therefore  are were classed as confectionary for VAT purposes.  Perhaps your friend is not VAT for registered, if they are VAT registered, surely she should be charging VAT. 

molerat

Brownies are cakes (according to a few tax sites) so no VAT.