VAT and the Meal Deal

VAT and the Meal Deal

One of the major headaches for many grocery retail businesses in the UK is how to deal with VAT on multibuy offers and other retail discount schemes. It can be a nightmare for tax professionals – or actively planned for by organisations to maximise sales through the lower pricing available.

As I often deal with expenses, the lunch “meal deal” frequently comes up, and understanding the paperwork involved or getting systems to accurately report the tax values is inherently difficult.

The UK operates a principled VAT regime in relation to the taxable nature of different goods and services. This includes food products that are judged essential and therefore subject to VAT at a rate of 0% (not exempt). Exceptions to this, though, include luxury items, such as:

  • Alcohol
  • Biscuits
  • Confectionery
  • Hot foods
  • Snack products (crisps, prepared popcorn, shelled nuts, etc.)

There is a line between what is essential and not, with manufacturers and retailers very eager to use the 0% rate. As a result, there have been numerous legal cases in this area, especially the infamous Jaffa cakes: United Biscuits (LON/91/0160).

How Is VAT Calculated on Meal Deals?

The meal deal adds another level of complexity because of the constituent parts. Below is an example of how to work out VAT on meal deals:

  • Mains are generally subject to VAT at 0% and include pasta, sandwiches, salads, soups, wraps, ready meals, etc. Hot food can be the exception and subject to 20%.
  • Snacks vary depending upon the product type. Examples include biscuits (except when covered in chocolate), fruit, and flapjacks, which are subject to VAT at 0%, and cakes, crisps, nuts, cereal bars, and chocolate bars at 20% VAT.
  • Drinks again vary depending upon the product type. Examples are milk and milkshakes (and other milk-based drinks) at 0% VAT and bottled water, fruit smoothies, and soft drinks (lemonade, cola, etc.) at 20% VAT.

So, if we take an example of three items valued as follows:

  • Main = £3.50
  • Snack = £1.75
  • Drink = £1.25

Total = £6.50
 
However, the meal deal will cap that total at £5. So, how is the VAT calculated on meal deals?

You have to calculate the sales value of the item after the discount and then calculate the VAT at the percentage. Sounds simple, but let’s complete the example:

£5 divided by £6.50 equals a percentage discount of 76.92%.

Therefore, the “real” sales price of each item is:

  • Main: £3.50 × 76.92% = £2.69
  • Snack: £1.75 × 76.92% = £1.35
  • Drink: £1.25 × 76.92% = £0.96

The VAT is then calculated on the item and its treatment.

  • Main: £3.50 sandwich, 0% VAT, i.e., VAT = £0
  • Snack: £1.75 apple, 0% VAT, i.e., VAT = £0
  • Drink: £1.25 cola, 20% VAT, i.e., VAT = £0.21 (actual gross discounted price equates to £0.16 VAT)

The point of sale (POS) system has to handle this and all the variations available to calculate the VAT correctly, so for retailers in the UK, this is a large responsibility for the Tax, Finance, and IT teams.

Also, this has been a bone of contention, and there have been numerous court cases where traders have:

  • Disputed the tax treatment, e.g., a yoghurt drink is milk-related, poppadoms are not crisps, etc.
  • Tried to take advantage of one of the constituents being “free” or at a lower single value

These have pushed the boundaries and been contested by HMRC, and the principles have remained largely static in that foods are at 0%, luxuries are 20%, and the discount applies across the board at the same pro rata.

The POS systems have to work correctly to produce the correct sum of VAT to be accounted for and paid to HMRC. However, getting the receipt to exhibit this is difficult, and I rarely see receipts from grocery retailers with a VAT breakdown. The major retailers do, however, use symbols as below to denote standard-rated items:

  • Asda: V
  • M&S: *
  • Morrisons: A
  • Sainsbury’s: *
  • Tesco: V
  • Waitrose: V

Often though, self-checkout till receipts do not provide this level of detail, and I tested it at a couple of retailers this week and could not get a receipt with a VAT identifier, let alone a breakdown.

So as far as input VAT recovery goes, this is a complicated thing to deduct correctly. I have seen Finance teams and VAT Reclaim companies struggle with this, let alone software like enterprise management systems (EMS) and enterprise resource planning (ERP) systems. Indeed, on an EMS like Concur or Oracle iExpense, the standard treatment is to opt not to deduct the VAT on groceries, and who knows what would happen if the traveller had to try to work this out.

Finally, at a practical level, and if you are the consumer:

  • If you have two items rated at 20% VAT rather than 0% VAT, the retailer will bear more of the liability from a VAT perspective.
  • If all three of the items are at 0% VAT, then in theory the meal should be healthier as they are not luxuries, e.g., fruit and a milkshake rather than a chocolate bar and a sugary cola. However, there is no guarantee of this as bottled water, which is calorie-free, has 20% VAT.

N.B. There are many more and controversial parts to this, for example, cold, hot, and warm sausage rolls or supermarkets with a café, so I have tried to stick to the main principles and scenarios.