A Worked Example of how a Cafe reduced their VAT liability
Written by Sach
To compliment our blog: Tips for navigating VAT compliance for Restaurants and Bars. We have prepared a blog to give you a real life example of the issues you are facing.
So let’s consider “Sunny Delightz”, a small cafe operating in Brighton. The cafe serves breakfast, lunch, and a selection of alcoholic and non-alcoholic beverages. They have a growing customer base and are contemplating registering for VAT to meet their expanding turnover.
Current Financials of Sunny Delightz
Turnover
Annual Turnover (Last 12 months): £90,000
Expected Turnover (Next 12 months): £120,000
Sales Breakdown
– Food Sales (Zero or Reduced-Rated): £70,000
– Non-Alcoholic Beverage Sales (Reduced-Rated): £30,000
– Alcoholic Beverage Sales (Standard-Rated): £20,000
Purchases
Ignored for illustration purposes only.
If you have purchases, you will need to consider this and include all purchases made into the your VAT calculation.
Understanding VAT Registration Requirements
Threshold
In the UK, businesses must compulsorily register for VAT if their taxable turnover exceeds £90,000 (current threshold for 2024/25 tax year) in the last 12 months or is expected to exceed it in the next 30 days.
Since Sunny Delightz is expected to generate a turnover of £120,000 in the next 12 months, VAT registration is mandatory.
- VAT Rates in the Hospitality Sector
Standard Rate (20%): Applies to alcoholic beverages. - Reduced Rate (5%): NO LONGER APPPLIES to non-alcoholic beverages & hot takeaway food. THIS STOPPED on 31 MARCH 2022.
These supplies are now Standard-Rated, 20%
Zero Rate (0%): Applies to cold takeaway food.
How a VAT Liability is Calculated
Step by Step guide
- Breakdown Total Taxable Sales
– Zero-Rated: Cold takeaway food: £30,000
– Hot takeaway food (Standard-Rated, 20%): £40,000
– Non-Alcoholic Beverage Sales (Standard-Rated, 20%): £30,000 – Alcoholic Beverage Sales (Standard-Rated, 20%): £20,000. - Calculate the VAT Liability on Sales
(Multiply your Gross sales by 1/6 to work our the VAT element for Standard-Rated Sales)
Let’s start with Zero-Rated Sales (0%)
Cold takeaway food: £30,000 x 0% = £0 VAT
Then the Standard-Rated Sales (20%)
Hot takeaway food: £40,000 x (1/6) = £6,667 VAT
Non-Alcoholic Beverage Sales: £30,000 x (1/6) = £5,000
Alcoholic Beverage Sales: £20,000 x (1/6) = £3,333 - Total up the VAT payable
Zero Rated (0%): £0
Reduced Rate VAT (5%): No Longer Applies
Standard Rated VA (20%): £15,000
Total VAT Liability: £15,000
N.b. For this illustration Sunny Delightz did not have any input VAT to reclaim.
If there is input VAT to reclaim, then this will be deducted from the Output VAT liability, to arrive at the VAT liability payable or VAT asset refundable.
This will also be dependent on the VAT scheme the business is registered with..
Which VAT scheme to adopt?
What do I need to Consider?
There are a variety of VAT schemes to choose from, but what VAT scheme is the tax efficient for Sunny Delightz?
Lets run through the most applicable VAT schemes:
Cash Accounting Scheme
VAT is paid based on the actual cash received, improving cash flow.
Ideal if customers tend to pay after delivery.
Flat Rate Scheme
A simplified approach where a flat rate (12.5% for cafes) is applied to the total turnover.
Standard VAT Accounting
Traditional quarterly VAT returns based on invoices issued and received.
Potential Savings?
Flat Rate VAT Payable = £120,000 (Total Turnover) x 12.5% = £15,000
Standard VAT Payable = £15,000*
Given the above scenario, it looks like on both schemes the VAT liability is the same. So which one is better?
*There will be input VAT to reclaim on Standard rated purchases, such as supplies and other premises based overheads.
Recommendation
Given the turnover size and taxable supplies, Sunny Delightz should consider the Standard Rated Scheme over the Cash Accounting Scheme and the Flat Rate Scheme.
This is because, being a cafe, VAT on sales will always be accounted when a customer has paid. So there is no difference between the Standard Rated Scheme and the Cash Accounting Scheme, when it comes to sales.
The advantage of the Standard Rated scheme will be when reclaiming input VAT on purchase invoices. The Standard Rated Scheme will allow Sunny Delightz to reclaim Input VAT on its purchases, at the date of the invoice not when that invoice is paid.
Sunny Delightz can benefit from the timing differences of accounting for input VAT when supplies are ordered rather than cash spent, especially if there are credit terms to be enjoyed.
Which further will reduce their VAT liability on the Standard Rated Scheme than if they were the Cash Accounting Scheme or the Flat Rate Scheme.
Steps to Implement
- Register for VAT and opt into the Standard Rated Scheme, highlight not on a cash basis.
- Monitor turnover and VAT returns using compatible digital accounting software (e.g., Xero)
- Ensure you account for all input VAT on your purchases
Conclusion
By choosing the Standard rated Scheme, Sunny Delightz can benefit from the potential savings. To ensure smooth implementation and compliance, it’s advisable to seek expert advice with your accountant or tax advisor.
Do I need to outsource my VAT function?
Pennyhills® can guide your hospitality business through the VAT registration process and provide tailored advice on the best scheme for you.
Reach out to us and drop us a line, and let us help you navigate VAT compliance smoothly.
See our blog Outsourcing Your Accounting: What are the benefits for your SME?
VAT Compliance and Advice is just one aspect of Pennyhills outsourced accounting service. To find out more about our approach, read our guide to outsourcing your accounting today.
Another unique thing about us?
We have worked with businesses across the hospitality sector. And the common thread that all our clients share is that they are diverse! If you think that you fit the bill, get in touch and see how we can add value to your business.
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