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Eat out to help out explained

By 7th August 2020

With the Chancellor’s Eat Out to Help Out Scheme up and running, are you prepared for the VAT implication?

Rishi Sunak is hoping his scheme will help out many restaurants and café’s over the month of August, offering a discounted rate to customers eating on Mondays to Wednesdays between 3rd August and 31 August 2020. But does the scheme mean businesses are offering a discount to customers on their bill?

The implication of a discount will affect whether or not they pay VAT to HMRC on the discounted amount or the full cost, which could impact cash flow in the short term.

When a business offers a true discount then VAT is due only on the discounted amount. But here, the business is still receiving the full cost of the food ordered, with half paid by the customer and half topped up by the government. So if it’s not a true discount, then isn’t the business still liable for VAT on the full amount ordered?

VATSC05830 says – In respect of the supply of goods or services, other than as referred to in Articles 74 to 77, the taxable amount shall include everything which constitutes consideration obtained from the customer or a third party [for which read the Government], including subsidies directly linked to the price of supply.

HMRC has confirmed that VAT then will still be due on the full value of the bill, before the discount has been applied.

So, the VAT you’ll need to set aside to repay should reflect the full amount billed, and not the discounted portion paid by the customer.

This VAT will need to be paid in full, within your correct return period for August when the service was provided. This potentially means you will not yet have received the refund from the Government before your have to settle the VAT due, so an issue for planning cash flow.

Remember that alongside the treatment for the Eat Out to Help Out scheme, the temporary reduced rating for VAT on catering supplies also still applies (to 5%), but this excludes alcohol.

Bearing all the above in mind, if your point of sale system does not enable you to adjust the VAT due automatically then you will be allowed to make a manual adjustment, to reflect the actual VAT due*.

Let’s use an example to illustrate the complexity here:

1: Meal for two people without alcohol:

2: Meal for two people, including alcohol:

 

Food cost – £15
Non-alcoholic beverages – £5
Total bill – £20
Total paid by customer = £10

Total paid by scheme = £10 (50% of the total bill as it is all for food and non-alcoholic beverages)

VAT due @ 5% = 0.95p

(1/21 is the VAT fraction to extract 5% VAT from a VAT inclusive price)

Food cost – £15
Alcoholic beverages – £5
Total bill – £20
Total paid by customer = £12.50

Total paid by scheme = £7.50 (50% of the bill excluding alcohol)


Total VAT due = £1.54

VAT due on food = 1/21 of £15 = £0.71 + VAT due on alcohol = 1/6 of £5 = £0.83

As always, we’re here to help and advise.

*With all this to contend with, HMRC have mentioned that they will accept estimated returns on Eat Out to Help Out in your first return, only if you are unable to calculate the adjustment accurately, but this will then need to be corrected on your next return, so at best a temporary respite.

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