Guide
VAT for hospitality businesses
Understanding VAT rules for restaurants, cafes, pubs, hotels, and other hospitality businesses. Covers food and drink VAT rates, the hot food test, premises facilities, accommodation, tips and service charges, and staff meals.
VAT in hospitality is more complex than in most other sectors. The same product can attract different VAT rates depending on whether it is hot or cold, eaten in or taken away, or served with or without facilities. Getting it wrong can result in significant underpayment or overpayment of VAT.
This guide explains the VAT rules specific to restaurants, cafes, pubs, hotels, and other hospitality businesses - helping you charge the correct rate and avoid costly mistakes.
Catering versus takeaway - why it matters
The single most important distinction in hospitality VAT is between catering (standard-rated at 20%) and cold takeaway food (usually zero-rated). Understanding this distinction is essential for every hospitality business.
Catering includes any supply of food where there is a service element - whether that is eat-in meals, hot food, or food consumed on your premises using facilities you provide.
Why this matters for your business: If you operate a mixed business (for example, a cafe selling sandwiches both to eat in and take away), you need systems to track which sales are which. A customer taking away a cold sandwich pays no VAT; the same sandwich eaten at your tables attracts 20% VAT.
The hot food test
All hot takeaway food is standard-rated at 20%, regardless of where it is eaten. But what counts as 'hot' for VAT purposes is more nuanced than you might expect.
Applying the hot food test in practice
Consider these common hospitality scenarios:
- Coffee shop selling toasted paninis: Standard-rated (20%) - heated to enable consumption hot
- Bakery selling pasties from a hot cabinet: Standard-rated (20%) - kept hot after heating
- Bakery selling freshly baked pasties cooling on a rack: Zero-rated (0%) - cooling naturally, not kept warm
- Supermarket selling rotisserie chicken: Standard-rated (20%) - hot at point of sale
- Deli selling cold sandwiches: Zero-rated (0%) if taken away, standard-rated if eaten on premises with facilities
Key decision: If you sell products that could be hot or cold (like pasties or pies), decide whether you will keep them warm or let them cool. This single decision determines your VAT treatment.
The premises facilities test
Even cold food becomes standard-rated if you provide facilities for customers to eat on your premises. This is the 'premises test' and it catches many businesses by surprise.
What counts as facilities?
HMRC considers you to be providing facilities if you offer:
- Tables and chairs (inside or outside your premises)
- Counters, shelf-bars, or standing areas designed for eating
- Trays provided for on-premises consumption
- Designated outdoor seating areas
Practical examples
Sandwich shop with no seating: Cold sandwiches taken away are zero-rated.
Same sandwich shop adds four chairs: Cold sandwiches eaten in become standard-rated. Takeaway sandwiches remain zero-rated, but you need a system to distinguish them.
Coffee van with a nearby public bench: If the bench is genuinely public (not provided by you), takeaway cold food remains zero-rated. If you placed the bench there for customers, it becomes a facility.
Food court in a shopping centre: Even though the seating is shared with other vendors, food eaten in the food court is standard-rated because the facilities are provided for eating.
Items that are always standard-rated
Some products are standard-rated regardless of temperature or where they are consumed:
- Alcoholic drinks - always 20%
- Soft drinks and mineral water - always 20% (even cold, even takeaway)
- Confectionery - chocolates, sweets, crisps, ice cream - always 20%
- Hot drinks - coffee, tea, hot chocolate - always 20%
- Catering for events - corporate hospitality, wedding catering, delivered platters - always 20%
Common mistake: Many hospitality businesses assume bottled water is zero-rated because it is 'food'. It is not - all beverages except plain milk are standard-rated.
VAT on accommodation
If you operate a hotel, B&B, guest house, or holiday let, accommodation VAT has its own rules - including an important exemption for longer stays.
The 28-day rule in practice
The 28-day exemption is valuable but has strict conditions:
- Right to occupy from the start: The guest must have the contractual right to stay for over 28 days from the beginning. A series of weekly bookings does not qualify
- Extensions: If a guest initially books for 14 days then extends to 35 days, you charge 20% VAT on the first 28 days. Only days 29 onwards are exempt
- Same person: The exemption applies per guest. If one guest leaves and another takes the room, each starts their own 28-day count
Breakfast included: When breakfast is included in the room rate, it shares the accommodation VAT treatment. A room-only rate for 30 days is exempt; the included breakfast is also exempt. But if breakfast is charged separately, it is standard-rated catering.
Tips and service charges
How you structure tips and service charges affects both VAT and your staff's take-home pay. Getting the structure right can benefit everyone.
Structuring tips correctly
The VAT treatment depends entirely on whether the payment is genuinely voluntary:
Mandatory service charge (cannot be removed):
- Part of the price - subject to 20% VAT
- Employer NI contributions apply if paid to staff
- Counts towards VAT registration threshold
Optional service charge (customer can request removal):
- Outside scope of VAT if genuinely removable
- The bill must make clear it can be removed
- Does not count towards VAT registration threshold
Tronc scheme (independent distribution by troncmaster):
- Outside scope of VAT
- No employer NI contributions
- Staff still pay income tax via PAYE
- Troncmaster must be independent of management
Tip: If you currently add a mandatory service charge, consider making it optional instead. You will collect the same amount in most cases, but without paying VAT on it and without employer NI liability if distributed via a tronc.
Staff meals
Providing meals to staff is common in hospitality. The VAT treatment depends on whether you charge for them.
Free staff meals
If you provide meals to staff free of charge, there is no supply for VAT purposes. You do not charge output VAT. However, you can still reclaim input VAT on the ingredients if the meals are provided as part of the employment relationship (not gifts).
Subsidised staff meals
If staff pay anything for their meals (even a nominal amount), you must charge VAT on the amount they pay. If you charge staff £2 for a meal, you must account for VAT on that £2.
Business entertainment
Staff meals provided as business entertainment (celebration meals, client entertainment where staff attend) have different rules. You cannot reclaim input VAT on business entertainment, even if you are providing it.
Practical approach: Many hospitality businesses provide free staff meals during shifts. This is the simplest approach - no output VAT to account for, and you can still reclaim VAT on ingredients.
Common hospitality VAT mistakes
HMRC regularly identifies these errors in hospitality VAT compliance:
- Treating all drinks as zero-rated: Only plain milk is zero-rated. All soft drinks, fruit juices, bottled water, and alcoholic drinks are standard-rated
- Not separating eat-in from takeaway: If you have seating, you must track which cold food sales are eaten in (20%) versus taken away (0%)
- Keeping pasties warm: A pasty in a hot cabinet is standard-rated. The same pasty cooling on a rack can be zero-rated
- Mandatory service charges: If customers cannot remove the service charge, you must pay VAT on it
- Forgetting the 28-day exemption: Long-stay hotel guests (over 28 days) should have exempt accommodation - this saves you and them 20%
- Mixed supplies in meal deals: A meal deal combining zero-rated, standard-rated, and reduced-rated items needs careful apportionment
- Event catering assumptions: All outside catering is standard-rated, even cold buffets delivered to offices
Record keeping for hospitality VAT
Hospitality businesses face unique record-keeping challenges because of the mix of VAT rates. Your records must enable you to:
- Separate standard-rated sales from zero-rated sales
- Track eat-in versus takeaway for cold food
- Identify hot versus cold food sales
- Record tips and service charges separately from food sales
- Track accommodation separately from food and drink
EPOS configuration
Modern EPOS (electronic point of sale) systems can handle multiple VAT rates. Configure your system to:
- Assign the correct VAT rate to each product
- Prompt staff to select 'eat in' or 'take away' for cold food items
- Record service charges as a separate category
- Generate VAT reports splitting sales by rate
If you use a retail scheme: You may be able to simplify VAT calculations by using one of HMRC's retail schemes. These work from your total takings rather than individual transactions. See our guide to VAT retail schemes for details.
What to do next
To ensure your hospitality business handles VAT correctly:
- Audit your menu: Go through every item you sell and assign the correct VAT rate. Pay special attention to drinks (all standard-rated except plain milk) and cold food that could be eaten in or taken away
- Configure your EPOS: Set up your till system to track different VAT rates and prompt for eat-in/takeaway on relevant items
- Review service charges: If you add a mandatory service charge, consider making it optional to avoid VAT and employer NI
- Check accommodation bookings: If you provide accommodation, ensure long stays (over 28 days) are correctly marked as exempt
- Train your staff: Front-line staff need to understand when to charge different VAT rates, especially for eat-in versus takeaway
- Review your hot food policy: Decide whether products like pasties are sold hot (standard-rated) or allowed to cool (can be zero-rated)