VAT on drinks UK: Coffee, tea and the taxman’s decree

VAT on drinks in the UK can be surprisingly complicated. While many people assume all beverages are zero-rated, a wide range of drinks – from alcoholic beverages to soft drinks and hot takeaway coffees – are actually charged at the standard 20% VAT rate.

The rules depend not only on the type of drink, but also where it’s sold, whether it’s hot or cold and how it’s consumed. Understanding which drinks are zero-rated, which are standard-rated and how VAT interacts with excise duty is essential for both businesses and consumers.

We’ll break down the VAT rules for drinks so you can avoid confusion and ensure compliance.

Key takeaways:

• Not all drinks are zero-rated. While tea, coffee and milk purchased for home consumption are usually zero-rated, most other beverages – including alcoholic drinks, soft drinks, sports drinks, mineral water and hot takeaway drinks – are subject to the standard 20% VAT rate.
• Location and consumption matter. Drinks served as part of catering (restaurants, pubs, cafes) or intended for consumption on the premises are always standard-rated – even if they’re items normally zero-rated when bought from a shop.
• Alcoholic drinks are subject to both VAT and excise duty, which is a tax on the manufacturer rather than the consumer. Excise duty can vary depending on the type and strength of the beverage.
• While end consumers cannot get a refund on VAT paid for drinks, VAT-registered businesses can reclaim VAT on drinks purchased for resale or business purposes – provided proper records and invoices are maintained.

How is VAT applied to drinks?

When it comes to VAT on drinks in the UK, most food and drink for human consumption is thought of as zero-rated. However, a surprising number of drink-related items are actually subject to the standard rate of 20%. These include:

• Any drinks served as part of catering services
• Alcoholic drinks
• Sports drinks
• Hot takeaway drinks
• Soft drinks
• Mineral water

When HMRC refers to drinks served as part of catering services that covers everything from a wedding catering company to a pub to a fast food joint. For any drinks you’re served with the intention of drinking them in a communal area, VAT will be charged as part of the total value of the dining experience.

But don't worry, we have some good news: tea, coffee and milk that you buy in the shops for consumption at home (or to take away so long as it’s cold) get the special treatment of zero-rated VAT.

Also, keep in mind VAT rules can change like the weather. It's best to consult HMRC VAT food notice or seek professional advice for the most up-to-date and accurate details on how VAT applies to drinks in the UK.

Still confused? Keep reading to discover the specific VAT rate of the drink you have in mind and the taxation laws around it.

VAT rates for different types of drinks

As a rule of thumb, if a drink isn’t milk, tea or coffee and you’re buying it from the shops, it will be standard rated. If you’re buying the drink from a pub, restaurant or cafe and it’s hot and/or alcoholic, it will also be standard rated. If you’re having the drink to take away and it’s cold, it may be zero-rated – but only if it meets certain requirements.

Are there tax exemptions for VAT on drinks?

Tax exemptions are special provisions in the tax law that allow certain individuals, organisations or activities to be excluded from paying taxes on certain income, transactions or goods.

There are no specific tax exemptions for VAT on drinks. Instead, there are zero-rated items that fall within the VAT scheme, but have a 0% VAT charge – like tea bags and coffee beans. This means you can reclaim any VAT paid on those items for your business, but won’t have to charge VAT when you sell it on.

So, while there aren't tax exemptions for VAT on drinks, zero-rated items provide an opportunity to reclaim VAT and improve cash flow. Remember to distinguish between zero-rated and exempt items when managing your VAT return!

VAT on soft drinks vs alcoholic beverages – what’s the difference?

Both alcoholic beverages and eligible soft drinks have the same VAT rate of 20%, but alcohol is also subject to excise duty – more on that later.

When it comes to alcohol and VAT, there’s a difference between beverages that contain booze and food that contains booze. Take a look at this table from HMRC’s website to get an idea of where the line is drawn:

What is excise duty, and how does it relate to VAT on drinks?

Excise duty is a fee paid by manufacturers on certain goods. It’s different from sales tax or VAT, as these are a tax on the consumer, whereas excise duty is a tax on the manufacturer. The manufacturer can choose to pass that cost onto consumers, but it may make their product less competitive on price.

Excise duty is added to the cost of specific products, like gasoline, tobacco and alcohol to address three types of problems:

• Health risks from harmful substances
• Environmental damage
• Socially harmful activities

The idea is the money collected from excise duty is then used for specific causes related to those products. For example, taxes on tobacco can be used for anti-smoking campaigns or healthcare for people with cancer.

The exact charge varies depending on the nature and strength of the alcohol in question and is explained in detail on HMRC’s website.

For example, excise duty on cider that’s at least 3.5% in alcoholic strength but less than 8.5% will be £9.67 per litre of alcohol. While duty on spirits, wine and other fermented products is at least 3.5% but less than 8.5%, ABV is £24.77 per litre of alcohol.

Can VAT on drinks be refunded?

In the UK, VAT on drinks tends to not be refundable for the end consumer. Remember VAT is a  consumption tax that is typically included in the price of goods and services. When you purchase a drink, the price you pay already includes VAT, so it's not possible to get tax refunds.

However, businesses may be able to claim tax refunds on drinks if they meet certain criteria. For example, if a business purchases drinks for resale they may be able to reclaim the VAT paid on those purchases by offsetting it against the VAT they charge on their sales.

Remember VAT refund procedures and eligibility criteria can change over time. Consult HMRC’s website for the most up-to-date and accurate information on VAT refunds for drinks in the UK.

How can businesses comply with VAT on drinks?

Ensuring compliance with tax regulations on drinks is crucial to avoid penalties, legal issues and damage to your all-important reputation. Here are the basic steps you need to take:

1. Understand the VAT laws and regulations specific to your product and location
2. Register for VAT if your business meets the threshold
3. Decide what kind of VAT accounting you’ll use
4. Determine the VAT liability of any drinks you sell
5. Keep proper records of all your transactions.
6. Charge and collect the correct amount of VAT from customers
7. Issue VAT invoices to suppliers
8. Submit VAT returns to HMRC
9. Stay updated on any changes to VAT regulations
10. Seek professional advice if you find yourself in a VAT quandary

Read more in our article on tax compliance to make sure you understand your VAT responsibilities.

Remember – when it comes to something as fiddly as VAT on drinks, keeping accurate records is sometimes easier said than done. Using up-to-date software and having watertight processes can help you keep up with tax regulations.

Speaking of which…

Simplifying VAT on drinks with Pleo

Pleo makes managing VAT on drinks a breeze for businesses in the beverage industry. Here's how:

• Smart company cards: Track drink expenses and ensure VAT compliance easily with Pleo's smart cards.
  
  
• Invoice management: Simplify VAT invoice tracking and processing for drink-related expenses.
  
  
• Receipt uploads: Easily upload and store drink receipts for accountability and compliance.
  
  
• Easy reimbursements: Track and reimburse out-of-pocket drink expenses effortlessly with Pleo's Reimbursement feature.