Cold curry & the sausage roll conundrum: VAT, gift cards and more.

by John Jones | Dec 20, 2023

Steve Fleming, Financial Director of 'Favouritetable' - the restaurant booking system, talks VAT, and how a little extra knowledge on gift cards, dining in and out, hot and cold food, and managing 'no-shows’ pays dividends. Interview by Mark Ferguson.

We answer some of the most commonly asked questions in the restaurant sector:

- when is VAT is applicable?

- what about VAT on hot, cold or warm food?

- Are restaurant gift cards VAT-able sales?

- When is VAT chargeable on online deposits and pre-payments?

- When is a service deemed delivered?

- What are the cash-flow benefits to restaurants of gift cards?

- Is VAT treated differently for dine-in and take-out?

- How can deposits reduce no-shows?

 - What on earth is VAT Notice 709/1?

Here's what Steve had to say:

Q: What do you see as the pros and cons of restaurant gift vouchers, and what part does VAT play in this?

Steve: Gift cards are really interesting. They’re effectively a method of pre-buying a meal at a restaurant where someone has paid for a service they haven't yet used.

The advantage to the restaurateur is there's no VAT chargeable on gift card income, because all you've done is purchased a method of paying for the food. The actual service takes place when you go and buy the food, either as a takeaway or sit-down meal, so the restaurant has some advance income to put in its profit.

It's like a deposit you hold until someone actually takes up the service. Gift cards can also have expiry dates, so if the card isn’t used by its end-date you can take it as income. The VAT-able element only comes into play at the point of redemption.

Q. Should restaurants encourage guests to pre-book, and what are the benefits of this approach?

Steve: Encouraging pre-booking is so important for restaurants. If a deposit is taken it also helps deal with the potential issue of no shows – guests are more likely to turn up if they’ve paid something, and if they don’t the deposit is yours to keep.

Additionally, as long as your processes are GDPR-compliant, you’re able to collect select customer details from bookings and, with their permission, build this into a library of contacts for marketing and communication purposes.

This all ties in with the wider issue of a booking software system like Favouritetable for making reservations.

This gives restaurants the advantage of knowing someone has booked a place, allowing them to get the requisite ingredients and staff in place, with the knowledge a customer is unlikely to be a no-show, or run off without paying, as they’ve handed over their details to make the reservation.

Q: Are there any differences on how VAT is charged on hot and cold food - and what are the opportunities for business owners?

Steve: This is a real minefield. The standard rule is that all hot food that's going to be eaten in a restaurant, or taken away from the premises is Vat-able

There are exceptions though. I bought a hot sausage roll the other day and it was interesting because I noticed there was no VAT on my receipt. The fact they cooked it and I was buying it to take-out meant it could be Vat-able, but because it was warm – not hot – VAT wasn't deemed necessary. However, if they’d reheated it for me, it would require a VAT charge.

Cold food, on the other hand, is not VAT-able. It's a really odd set of rules and a lot of places get caught out with these small requirements.

What restaurant owners can learn from this is that there is a way to perhaps adapt their practices. I remember a local curry restaurant that sold its meals cold. Customers would then take these home and reheat them, meaning they avoided VAT.

VAT rules can be so complicated that restaurateurs need to take their own advice from an accountant.

Question: How does VAT work when it comes to dining in or takeaway food?

Steve: It's all related to the hot and cold food issue. The liability definition states that takeaway food and drink has to meet certain tests. So, cold takeaway food and drink is zero VAT-rated, as long as it's not of a type that is always standard-rate.

However, this is where VAT gets very complicated. Take, for example, a packet of crisps that would always be VAT-able regardless, but if these are part of a cold takeaway they could be VAT-free in certain circumstances.

A lot of these rules can sound contradictory, but the key is ‘hot’ food, along with the definition of what the word hot means. A lot of businesses simply charge VAT to cover themselves and then try and figure out the minutiae later. It’s always best to take professional advice on your exact circumstance with someone who specialises in the hospitality sector to be safe.

For anyone starting a restaurant, pub, cafe, bar or other food-oriented hospitality business, or established restaurateurs seeking some clarity, this podcast is essential.