When it comes to VAT on drinks, businesses in the beverage industry need to stay on top of when to apply and not apply VAT so they don’t find themselves in hot water with HMRC.
As you may (or may not) be aware, Value Added Tax is a consumption tax aimed at the final consumer, but businesses are the ones who have to charge and collect the tax for their tax compliance.
The taxation laws and tax implications surrounding VAT on drinks are affected by everything from the ingredients to the temperature and location (yes, for real) of the product. It’s confusing to say the least – so we’re here to help make it a little easier to understand.
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.
|
Beverage |
Standard or zero-rated VAT? |
|
VAT on alcohol |
Yes, there is always VAT on alcoholic drinks at the standard rate of 20%. |
|
VAT on wine |
Yes, unfortunately wine is subject to standard-rated VAT at 20%. |
|
VAT on coffee |
If you were buying coffee beans, ground coffee or instant coffee to prepare drinks at home, they’re zero-rated. Meanwhile, if you’ve bought a coffee to enjoy at a restaurant, cafe or pub, there is VAT on coffee and the standard rate applies. |
|
VAT rate for hot drinks |
If you’re served a hot drink, regardless of whether it's to have in or take away, it’ll usually be charged at the standard rate of VAT at 20% |
|
VAT on soft drinks |
Most soft drinks (excluding milk) are subject to standard-rated VAT. |
|
VAT on bottled water |
Surprisingly, yes! Bottled water is subject to VAT, as it's not considered a basic necessity since tap water is available. |
|
VAT on milk |
Milk is generally not subject to VAT and is zero-rated for VAT purposes. However, flavoured milk, such as chocolate or strawberry milk, may be subject to standard-rated VAT. |
|
VAT on tea bags |
Good news: tea bags are zero-rated, so no extra VAT is charged. |
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:
|
Zero-rated |
Standard-rated |
|---|---|
|
Fruit preserved in alcohol |
Liqueur chocolates |
|
Alcoholic dessert jellies |
Semi-set alcoholic jellies designed to be swallowed as cocktails |
|
Rum babas |
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:
- Understand the VAT laws and regulations specific to your product and location
- Register for VAT if your business meets the threshold
- Decide what kind of VAT accounting you’ll use
- Determine the VAT liability of any drinks you sell
- Keep proper records of all your transactions.
- Charge and collect the correct amount of VAT from customers
- Issue VAT invoices to suppliers
- Submit VAT returns to HMRC
- Stay updated on any changes to VAT regulations
- 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.