Many farm shops and farm catering outlets will be getting ready to re-open for the Easter break at the start of April. Whilst diversification into some retail or catering might seem like a logical step for a business predominantly engaged in food production, it does bring with it a number of pitfalls, not least the somewhat arbitrary application of VAT across different products and activities.
Susie Swift, Partner with UK top 20 Chartered Accountant Saffery Champness based in the firm’s Inverness offfice, and a member of its Landed Estates and Rural Business Group, says:
The correct treatment of VAT on food products is a potential minefield and, of course, the right approach is not only expected by HMRC but also can impact heavily on a farm shop’s profit if incorrectly applied.
A farm business may want to take professional advice in respect of their product list, especially since the cost of getting it wrong can be significant. If an outlet is selling a product line as zero rated when it should be standard rated HMRC can go back four years to assess the VAT due with absolutely no chance to then pass that liability on to the customers who have long gone!
Regarding catering, the VAT registered farm café/restaurant must charge VAT on meals and items consumed on the premises, but where there is an option of sitting in or taking away then it can be difficult to know which rate of VAT is applicable.
If an item is standard rated (such as a cup of coffee) it makes no difference. However, if a cold sandwich for example is purchased and taken away from the café to be eaten off the premises then it should be zero rated.
Hot food created something of a stir a few years ago when changes were proposed to standard rate many pies and savory products sold warm. This remains complicated and zero rating any item that may fall into this category is far from risk free. Staff error can often be a problem, and setting tills up properly can help to avoid this.
Another point to consider is that retail or catering sales and other farming income from the business all count toward the VAT registration threshold where all activities are run under the same legal entity, or as a sole trader.
Also, some farm businesses may sub-let a defined area in the shop to third parties to sell to the public. In this situation making an option to tax should be considered and VAT charged to the third party to protect recovery of VAT on costs incurred in relation to the building, but do check if they are VAT registered and can recover it.
Mistakes can be costly and professional advice is recommended to set up this aspect of a business or to check that it is operating appropriately within the tax rules and without risk to profitability.
Examples of VAT treatment of different items sold through a farm shop (SR = standard rated; ZR = zero rated).
Fruit and veg – ZR
Milk – ZR
Fruit juice – SR
Chocolate biscuits – SR
Chocolate cake – ZR
Flapjacks (made of oats)– ZR
Coffee and tea (sold ready to drink) – SR
Bottled water - SR
Further information from:
Tel: 01463 246300