For those charities that run their own catering facilities – for example community cafes, bars in community centres, or bars/cafes/restaurants linked to museums, historic properties or arts venues – the Chancellor announced some very important new measures, including a change in the rate of VAT effective from 15 July and an important discount scheme in August.
Although not specifically aimed at charities, these changes could be very helpful for charities and other third sector organisations involved in catering activities. But there are some subtle issues to consider.
The points below also apply to cafes etc. run by any organisation, not just charities – so they include trading subsidiaries of charities, CICs etc. (Even if your organisation has a catering facility which you are not yet able to re-open it is worth planning ahead to take advantage of these changes. In particular you will need to open by August if you wish to use the promotional discount scheme – see point 4.)
1. VAT ON MOST CATERING SALES REDUCED TO 5% UNTIL 12 JAN 2021
To help the hospitality sector get back on its feet, the Chancellor announced a reduction in the rate of VAT to 5% (instead of 20%) for six months on most catering sales from Wednesday 15 July until 12 January 2021. Of course this is only directly relevant if your charity or subsidiary is VAT registered – but even if your turnover is currently below the VAT threshold (£85,000 turnover) it could alter the arguments about registering voluntarily, especially if you are looking to buy significant amounts of kitchen equipment, crockery, glassware etc on which you would have to pay 20% VAT.
The reduction to 5% applies to all food and soft drinks for consumption ON THE PREMISES but it does NOT apply to sales of alcoholic drinks which remain at 20%.
The 5% rate also applies to sales of TAKEAWAY hot food and non-alcoholic hot drinks (e.g. coffees). Most cold food sold for takeaway remains at 0% VAT (subject to existing rules on certain items such as crisps, chocolate biscuits, confectionery, ice cream which remain standard rated at 20% VAT if sold for takeaway).
For details see the updated version of HMRC VAT Notice 709/1: https://www.gov.uk/guidance/catering-takeaway-food-and-vat-notice-7091
Great care is therefore needed to ensure the right level of VAT is charged on each item, as most catering outlets that also do takeaway will have sales at 0%, 5% and 20%.
2. EXAMPLES OF IMPACT ON PRICING
It is up to the business or charity selling the product to decide whether to reduce prices to reflect the 5% VAT (in the hope of attracting more customers) or whether they use the lower rate of VAT to keep more of the sale price and thus get a better contribution to overheads.
Example – Question: Cups of coffee are normally sold for £2.40 (i.e. £2 plus 40p VAT at 20%). What should the price be with VAT at 5%?
Here a three possible answers:
A1: Keep the same base price of £2 exc. VAT, so the retail price will be reduced to £2.10 (i.e. £2 plus 10p VAT @ 5%) – so the customer saves 30p.
A2: Keep the same retail price of £2.40 so the base price will become £2.29 (i.e. £2.29 plus 11p VAT at 5% = £2.40) – so you get to keep £2.29 of the sale rather than £2 as before, so you get a extra 29p towards your overheads.
A3: You could do something in between – e.g. sell coffees at a retail price of £2.20 (£2.10 exc. VAT plus 10p VAT @ 5%) – so that’s a 20p saving to the customer AND an extra 10p for your overheads.
Note: To work out the VAT exclusive price of an item subject to 5% VAT, divide the VAT inclusive price by 1.05.
3. IMPACT ON CHARITY FUNDRAISING EVENTS THAT INCLUDE CATERING
Whilst most fundraising dinners etc. are on hold it is likely that charities will start to organise such events in the coming months.
The key issue to remember is that ticket sales for charity fundraising events are VAT EXEMPT (provided the normal conditions are met). So the ticket price isn’t directly affected by the VAT change explained above.
BUT If you are using a hotel or restaurant to provide the meal, they will now only need to charge the charity 5% VAT rather than 20% as in the past. So in general it should be possible to negotiate lower prices than before for the catering costs, which would allow the charity to make more profit on the event, this making it more worthwhile. (However, if the event is already planned check the agreement carefully with the venue to see if prices are VAT inclusive or VAT exclusive.)
4. EAT OUR TO HELP OUT SCHEME
On a separate note, charity-run cafes etc. which may want to register for the Government’s “Eat out to help out scheme”. During the month of August 2020, customers having food or drink on a Mon/Tue/Wed are eligible for a 50% discount on their meals (up to £10) which will be reimbursed by HMRC. Virtually any eat-in restaurant or cafe registered with their local authority as a food service business is eligible – see: https://www.gov.uk/guidance/register-your-establishment-for-the-eat-out-to-help-out-scheme
Please note that the discount does not include to alcoholic drinks (nor on service charges). So to get the full £10 discount customers would need to spend at least £20/head on food and soft drinks. (But even if they only spend £5/head excl alcohol they would still be able to get a £2.50/head discount.) Customers don’t necessarily have to have a meal: so long as food is available: even if customers only have soft drinks or teas/coffees the scheme can be used. But bear in mind that the scheme can only be used on the 13 days in August 2020 that fall on a Mon-Wed.
We also suggest charities may also wish to be cautious about how the promotional materials are used – the idea of the scheme is to help out cafe and restaurant businesses and people may think the “help out” term means that ALL venues offering the scheme are somehow helping charities: that is NOT the case. So charity venues may want to add something on the lines “By eating here and claiming the discount you are helping to generate funds for the xxx charity, as the Government will reimburse us.”
For those charities running residential accommodation where VAT is charged, it is worth noting that the 5% VAT rate applies to accommodation sales, as well as to food and drink sales where applicable – see VAT notice 709/3.
Kubernesis Bulletin (c) 2020 The Kubernesis Partnership LLP
These notes are intended to provide general guidance only. Legal issues are reported only in summary form and are not a full statement of the law.
The Kubernesis Partnership LLP – Charity Consultants
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