Zero VAT rated supplies: food and drink products
Zero VAT rated supplies: food and drink products
Applying the correct rate of VAT to a food or drink products can be complex, particularly because VAT legislation from decades ago is difficult to apply to new innovations in food and drink.
The UK tax system offers a zero VAT rate on a variety of goods and services, including certain food and drink items. This means that some food and drink products are zero rated, but not all. The rules for establishing the VAT treatment are not straightforward and sometimes contradictory. Understanding which items can be zero rated is crucial for both manufacturers and retailers, as it directly impacts pricing strategies and costings.
The essentials of zero rated VAT on food and drink
The zero rate was introduced to certain food and drink products to reduce the cost of essential items. However, the distinction between what is zero rated for VAT and what is not can be contentious. For example, while most staple grocery items like bread, milk, and fresh fruit and vegetables are zero-rated, other items such as snacks and confectionery are standard rated and so include VAT at the current rate of 20%.
The VAT legislation covering the liability of VAT on food and drink (The Value Added Tax Act 1994) was drafted to deal with food and drink products on offer at that time. Naturally, due to ever changing dietary requirements and eating habits, new products have been and will continue to be developed to meet consumer demand, and the existing legislation does not necessarily cover these. Manufacturing processes have also changed as technology has advanced, and this is important because it is one of tests that must be reviewed when considering if a product can qualify for zero rating. New innovative manufacturing processes may mean that a product is not ‘traditional’ in the legislative sense and therefore, cannot be zero rated.
Because the area is so complex, there has been significant litigation regarding the VAT liability of food and drink products including; snacking products such as fruit and nut bars, flapjacks, cake bars, giant marshmallows, sports nutrition products, flavoured milkshake powders and, recently, dietary supplements such as turmeric shots (which were held not to be a beverage so could be zero rated).
There are a number of multifactorial tests to determine if a product can be zero rated, including the nature and description of the products, the ingredients, the manufacturing process, the size and appearance, taste and texture, packaging, marketing and the circumstances of consumption.
Faced with this, the options for manufacturers/retailers are to:
- request a ruling or clearance from HMRC (although it is not guaranteed one will be forthcoming and may involve lengthy delays);
- be prudent and standard rate potential zero rated products, thus suffering a 20% cost on margin; or
- zero rate the product with the risk of the incorrect rate being applied and HMRC raising assessments for underpaid VAT plus penalties and interest.
The importance of correct VAT classification
For businesses, the implications of getting it wrong can be significant. Incorrect classification of item can lead to either overcharging customers by adding VAT when it's not due or undercharging by failing to add VAT when required and potentially suffering the VAT cost should HMRC assess. Both scenarios can have financial repercussions and potentially damage both the business’ financial position and customer trust.
Therefore, it's essential for businesses to have a thorough understanding how zero rating may apply to its products. If your business is unsure about the VAT classification of your products, engaging an experienced VAT consultant is an important step.
How we can help
Our team is well-versed in the intricacies of VAT zero rated supplies, and we're committed to delivering exceptional client service every day. We understand that your business is unique, and we take the time to understand you and your products, ensuring that every item is correctly classified. Whether you're dealing with zero rate VAT items or standard rated items, we're here to provide clear guidance.
Of course, there may well be situations where HMRC takes a different view of the VAT treatment of your products - we also have significant experience of dispute resolution to negotiate agreement with HMRC or if required, support you in proceeding to litigation.
Navigating the zero VAT rate on food and drink items can be challenging, but with the right support, it doesn't have to be a headache.