VAT on drinks: Coffee, tea and the taxman’s decree…
VAT on drinks is confusing, to say the least, with things like the temperature, location and the ingredients (yes, for real) of the product itself affecting taxation laws and tax implications.
As you may (or may not) be aware, Value Added Tax is a consumption tax aimed at the final consumer, but businesses are the ones who have to charge and collect the tax for their tax compliance. When it comes to VAT on drinks, businesses in the beverage industry need to stay on top of when to apply and not apply VAT so they don’t find themselves in hot water with HMRC.
How VAT is applied to drinks
When it comes to VAT on drinks in the UK, most food and drink for human consumption is thought of as zero-rated. However, a surprising number of drink-related items are subject to the standard rate of 20% like:
- Any drinks served as part of catering services
- Alcoholic drinks
- Sports drinks
- Hot takeaway drinks
- Soft drinks
- Mineral water
When HMRC refer to drinks served as part of a catering that covers everything from a wedding catering company to a pub to a fast food joint. For any drinks that you’re served with the intention of drinking them in a communal area, VAT will be charged as part of the total value of the dining experience.
Don't worry, we have some good news: Tea, coffee and milk that you buy in the shops for consumption at home (or buy it to take away so long as it’s cold) get the special treatment of zero-rated VAT.
Also, remember to keep in mind VAT rules can change like the weather, so it's best to consult HMRC VAT food notice or seek professional advice for the most up-to-date and accurate details on how VAT applies to drinks in the UK.
What are taxable goods and taxable supplies?
You may have heard the terms taxable goods and supplies thrown around when it comes to VAT on drinks. Taxable goods are products that you have to pay VAT, amongst other kinds of taxes, on. These taxes are added to the price and are typically paid by the final consumer. Some drinks that are taxable goods include alcoholic beverages and sports drinks.
Meanwhile, taxable supplies include both goods and services that you have to pay VAT or other taxes on. In other words, the whole experience of drinking out is a taxable transaction.
VAT rates for different types of drinks
As a rule of thumb if a drink is not milk, tea or coffee and you’re buying it from the shops it will be standard rated. If you’re buying the drink from a pub, restaurant or cafe and it’s hot and/or alcoholic it will also be standard rated. If you’re having the drink to take away and it’s cold it may be zero-rated but only if it meets certain requirements.
Standard or zero-rated VAT?
VAT on alcohol
Yes, there is always VAT on alcoholic drinks at the standard rate of 20%.
VAT on wine
Yes, unfortunately wine is subject to standard-rated VAT at 20%.
VAT on coffee
If you were buying coffee beans, ground coffee, or instant coffee to prepare drinks at home then they’re zero-rated.
Meanwhile, if you’ve bought a coffee to enjoy at a restaurant, cafe or pub there is VAT on coffee and the standard rate applies.
VAT rate for hot drinks
If you’re served a hot drink, regardless of whether its to have in or take away, it will usually be charged at the standard rate of VAT at 20%
VAT on soft drinks
Most soft drinks (excluding milk) are subject to standard-rated VAT.
VAT on bottled water
Surprisingly, yes! Bottled water is subject to VAT as it's not considered a basic necessity since tap water is available.
VAT on milk
Milk is generally not subject to VAT and is zero-rated for VAT purposes.
VAT on tea bags
Good news, tea bags are zero-rated, so no extra VAT is charged.
Is there a difference in VAT rates for soft drinks and alcoholic beverages?
Both alcoholic beverages and eligible soft drinks have the same VAT rate of 20%, but alcohol is also subject to excise duty (keep reading to hear more.)
When it comes to alcohol and VAT there’s a difference between beverages that contain booze, and food that contains booze. Take a look at this table from HMRC’s website to get an idea of where the line is drawn:
Fruit preserved in alcohol
Alcoholic dessert jellies
Semi-set alcoholic jellies designed to be swallowed as cocktails
Tax exemptions and excise duty
Tax exemptions are special provisions in the tax law that allow certain individuals, organisations, or activities to be excluded from paying taxes on certain income, transactions, or goods.
There are no specific tax exemptions for VAT on drinks. Instead, there are zero-rated items that fall within the VAT scheme but have a 0% VAT charge like tea bags and coffee beans. This means you can reclaim any VAT paid on those items for your business but won’t have to charge VAT when you sell it on.
So, while there aren't tax exemptions for VAT on drinks, zero-rated items provide an opportunity to reclaim VAT and improve cash flow. Remember to distinguish between zero-rated and exempt items when managing your VAT return!
What is excise duty and how does it relate to VAT on drinks?
Excise duty is a fee paid by manufacturers on certain goods. It is different from sales tax or VAT as that is a tax on the consumer, whereas excise duty is a tax on the manufacturer. The manufacturer can choose to pass that cost onto consumers but it may make their product less competitive on price.
Excise duty is added to the cost of specific products, like gasoline, tobacco, and alcohol to address three types of problems:
- Health risks from harmful substances
- Environmental damage
- Socially harmful activities
The idea is the money collected from excise duty is then used for specific causes related to those products. For example, taxes on tobacco can be used for anti-smoking campaigns or healthcare for people with cancer.
The exact charge varies depending on the nature and strength of the alcohol in question and is explained in detail on HMRC’s website. For example, excise duty on cider that’s at least 3.5% in alcoholic strength but less than 8.5% will be £9.67 per litre of alcohol. Whilst duty on spirits, wine and other fermented products is at least 3.5% but less than 8.5% ABV is £24.77 per litre of alcohol.
Can VAT on drinks be refunded?
In the UK, VAT on drinks tends to not be refundable for the end consumer. Remember VAT is a consumption tax that is typically included in the price of goods and services. When you purchase a drink, the price you pay already includes VAT, so it's not possible to get tax refunds.
However, businesses may be able to claim tax refunds on drinks if they meet certain criteria. For example, if a business purchases drinks for resale they may be able to reclaim the VAT paid on those purchases by offsetting it against the VAT they charge on their sales.
You may also be able to get a VAT refund If you export drinks outside the UK or EU via the VAT export scheme. The goods must physically leave the country, and you need to provide evidence, such as shipping documentation or customs declarations, to support your claim.
Remember VAT refund procedures and eligibility criteria can change over time. Consult HMRC’s website for the most up-to-date and accurate information on VAT refunds for drinks in the UK.
How can businesses comply with VAT on drinks?
Ensuring compliance with tax regulations on drinks is crucial to avoid penalties, legal issues, and damage to your all-important reputation. Read our article on tax compliance to make sure you understand your VAT responsibilities. Here are the basic steps you need to take:
- Understand the VAT laws and regulations specific to your product and location
- Register for VAT if your business meets the threshold
- Decide what kind of VAT accounting you’ll use
- Determine the VAT liability of any drinks you sell
- Keep proper records of all your transactions.
- Charge and collect the correct amount of VAT from customers
- Issue VAT invoices to suppliers
- Submit VAT returns to HMRC
- Stay updated on any changes to VAT regulations
- Seek professional advice if you find yourself in a VAT quandary
Remember sometimes it’s easier said than done to keep accurate records when it comes to something as fiddly as VAT on drinks. Using up-to-date software and having watertight processes can help you keep up with tax regulations.
Speaking of which…
Simplifying VAT on drinks with Pleo
Pleo makes managing VAT on drinks a breeze for businesses in the beverage industry. Here's how:
- Smart company cards: Track drink expenses and ensure VAT compliance easily with Pleo's smart cards.
- Invoice management: Simplify VAT invoice tracking and processing for drink-related expenses.
- Receipt uploads: Easily upload and store drink receipts for accountability and compliance.
- Easy reimbursements: Track and reimburse out-of-pocket drink expenses effortlessly with Pleo's Pocket feature.
Smart company cards for your business
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