VAT registered businesses that make exempt supplies (partially exempt businesses) cannot fully recover the VAT incurred on costs. Most partially exempt businesses such as insurers, financial service providers, education providers and health care providers use contract caterers to run their onsite catering (restaurants, vending machines and hospitality). If your business is incurring VAT on the full cost of catering this blog may provide some suggestions as to how that VAT cost can be minimised by structuring your catering arrangements in the most VAT efficient manner.
Typically, a contract caterer will supply food and drink directly to the consumers (usually staff and visitors) under an agreement with the partially exempt business. In addition to charging the consumer for their meal the business may also pay a charge to the contractor to ensure their presence on site is commercially viable.
A more VAT efficient relationship is for the caterer to ‘act as agent’ of the partially exempt business in assisting them in supplying food and drink to the consumer. In everyday language, this means that it is the business, not the caterer, who for VAT purposes supplies the prepared food to the consumer but that this is achieved by using the resources provided by the caterer (staff, food/sundries, management expertise). This arrangement:
- may increase the total value of the partially exempt business’ taxable supplies and means that any VAT incurred that is directly connected to its supplies of catering can be recovered in full (this will include food, drink, consumables purchases, as well as any VAT bearing expenditure on catering facilities); or,
- the supply of food and drink to the consumer may be subsumed within an overall supply of VAT exempt education or healthcare e.g. the charges for canteen meals in a university to students are considered an extension of the charges for VAT exempt education.
- Increased VAT recovery on the property where the canteen facilities are based. It is possible to agree a ‘special method’ that recognises that discrete portions of a property used to make ‘taxable’ canteen supplies should enjoy full or increased VAT recovery.
It is possible to reduce the amount of VAT incurred by using provisions agreed with HMRC.
In its ‘memorandum of understanding on VAT practice in the contract catering industry’ HMRC accept that under agency contracts for the provision of catering:
- VAT is not charged to the partially exempt business on wages of the catering staff employed at the canteen (by concession, wages are treated as a disbursement) by its contract caterer.
- The items required for a supply of catering may be charged at their wholesale VAT liabilities to the business to whom the catering business contracts. This means that food-stuffs may be treated as a zero-rated.
In order for VAT savings to be obtained it is important that written contracts and the reality of the supply chain properly represent the arrangements above. Constable VAT has worked with several clients to help ensure VAT savings are achieved where possible. By structuring arrangements effectively, VAT incurred on catering can be reduced and overall VAT recovery may be improved on overheads and property related costs. If you would like to discuss this matter further please do not hesitate to contact Sophie Cox or Robert Thorpe on 01206 321029.
We would recommend specialist VAT advice is taken before catering contracts are put out to tender. We can also assist catering contractors by helping them achieve VAT savings for their clients along with ensuring that, where they act as principal, any opportunities to reduce VAT due on catering sales are recognised.