Everything new businesses need to know about VAT

For any new enterprise, there is a seemingly endless list of tasks from day one. But what happens after it has secured funding, designed and tested a delicious product, carefully placed some glossy photographs on social media, and established a market of hungry customers? 

An important consideration for any fledgling business should be VAT. It can be a daunting issue, and for the food and beverage sector there are lots of specifics to consider. That said, for those trading in zero rated goods (most food) there can be benefits to registering for VAT as soon as possible.

What impact can VAT have on margin?
As most foods are zero rated for VAT it may not be necessary to charge VAT to customers. There are exceptions (the infamous case of the Jaffa Cake illustrates an example) so it is important to get VAT liabilities correct from the start. 

In the Jaffa Cake case, there was a disagreement between HMRC and McVities about whether Jaffa Cakes are indeed cakes or biscuits. It mattered because chocolate covered biscuits are subject to VAT, but chocolate covered cakes aren’t. 

While counter arguments about how they are sold (in the biscuit aisle) were heard, the argument was eventually settled by the producer baking a cake-sized Jaffa Cake to show prove they had a cake sponge. It is also a key factor that a Jaffa Cake becomes dry when stale (like a Victoria sandwich) whereas biscuits go soft. Personally, we would have also argued that the poor ‘dunkability’ of a Jaffa Cake clearly banishes it from biscuit status.

The VAT law for food contains exceptions to a main rule and exceptions that override the exceptions, and these complications make it important to determine the correct VAT treatment right at the start. In recent years there have also been updates for new products such as spirulina, health food bars, marshmallows and meal replacements, among others, so we recommend seeking advice from a professional. 

If a business gets this wrong, its margins could be compromised by 20% — especially if the product it thought was zero rated turns out to be standard rate.

When should a business register for VAT?
Next up is the issue of registering for VAT. Whilst registration is compulsory for a business with a taxable turnover exceeding £85,000 per annum, a business can also register on a voluntary basis if it can evidence an intention to trade.

This means it can start reclaiming VAT on set up costs – even before the first sale. For businesses that expect to be in a regular repayment position (claiming more VAT on costs than the VAT due from sales) it is also possible to submit monthly returns.

Naturally, the 20% VAT paid when investing in kitchen equipment, premises and agency staff could come in very useful. Don’t forget that commercial energy consumption is charged at 20% in comparison to domestic at 5% so being able to claim that back from HMRC could cushion some of the impact of high fuel prices. 

The benefits to cashflow could make all the difference in those difficult early days, but of course HMRC is very likely to check first returns for new businesses, so it’s important to have the right support and advice in place.

Making Tax Digital (MTD) 
We highly recommend seeking out MTD compliant accounting software as, with few exceptions, HMRC now requires VAT returns to be submitted and maintained digitally. Most of the mainstream suppliers of software have MTD products, but if a business prefers to use a simple spreadsheet it may be possible to use bridging software to comply.

How does additional income impact VAT?
In these days of minimising waste, businesses may plan on boosting sales by finding an alternative purpose for a by-product or ‘waste material’. If so, and this is likely to produce additional sales, the VAT liability should be considered, and any income reported on the VAT return.

What are the VAT rules for e-commerce, exporting and importing?
New e-commerce rules have been introduced since the UK withdrew from the EU and consignments under £135/$150 have specific rules. Additionally, selling through an online marketplace may give other issues to consider, as there are a further set of VAT rules aimed at online sellers.

If sourcing goods or ingredients from the EU, be aware of new border controls for high-risk food being introduced between 2023 and 2025. These are likely to result in higher costs and administrative burdens for bringing goods into the UK. The plans and changes are moving at pace, so we recommend keeping aware and making plans to keep supplied. 

Important VAT tips
- We recommend investing in advice at the outset. Nobody wants a nasty surprise from HMRC, so at least for the first year or so of trading it is a wise investment to have professional support.

- When choosing accounting software, make sure the product chosen is MTD compatible.   

- If unsure about the VAT liability of a product, seek advice. It’s simple if a business sells apples and pears but what about additional products – maybe the business turns ‘spoiled’ fruit into a drink? Sometimes VAT rules for food and drink can be quirky and even seasoned professionals may have to seek clearance from HMRC for new innovations. Better to check than to get it wrong.

- Get registered for VAT – even if the business is not yet trading. So long as there is a credible business plan which shows an intention to trade, the sooner the business registers the sooner it will be able to receive refunds of the VAT paid on the costs it is incurring. 

- Think about all the income streams the business will have, each may form part of its turnover for VAT purposes, so understanding how they are impacted will be essential. For example, sub-letting kitchen space and holding intellectual property potentially have VAT implications to factor in.

- Where is the business sourcing ingredients and stock from – if suppliers are outside the UK, it will most likely need additional advice from a customs specialist. 

- Finally, consider selling platforms and supply chains. Will they involve intermediaries? Are sales made directly to consumers or to wholesalers? There are so many questions, and the options can be overwhelming. Mapping the supply chains both as a buyer and as a seller can help highlight areas of concern so that they can be addressed before they cause issues.