More clarity required on temporary VAT reduction

25 July, 2020
Alex Demetriou

As discussed in our recent newsletter we, alongside others in the industry, are awaiting a bit more clarity from the government on the temporary VAT reduction.

The main area in question is the distinction between alcoholic and non-alcoholic drinks. If a customer orders a bottle of wine, a pint of lager or a bottle of cider it’s very clear and straightforward. These sales are still part of the 20% VAT rate.

The issue comes when a customer orders a spirit and a mixer, such as a gin and tonic, a cocktail or a liqueur coffee. Is the whole product liable to the 20% VAT rate including the non-alcoholic elements? Initial feedback from HMRC was that if the Gin and the Tonic were listed separately, then the 20% would apply to the Gin and 5% would apply to the tonic, although we understand that this is currently under review.

If HMRC decide that the non-alcoholic elements can be separated out and claimed at 5% VAT then the system could be open to abuse. As an example, if a Gin is £3 and the tonic £1.50, giving a total of £4.50 for the drink. Most till systems would split the two items out, so they would be listed separately and therefore the variance in VAT can be factored. The issue that Government will have is there is nothing stopping venues changing pricing strategy to make the Gin £1 and tonic £3.50. The price of the Gin & Tonic remains the same, but the VAT treatment is very different. This would not be illegal, but most certainly is sharp practice. There is a chance therefore, that once a tonic water is mixed with a gin, the ‘drink’ is now deemed alcoholic and therefore the entire entity is charged at 20% VAT. Although the administration of this through automated till systems could be challenging, particularly when trying to align stock takes with sales data.

Gin & Tonic being charged at 20% VAT would align with the way we serve cocktails, which have an element of soft drink, but the final result is an alcoholic beverage. There is an argument for Liqueur Coffees both ways, to either have it as one item or list it as two, with coffee and liquor separately.

The VAT reduction to 5% was hugely welcomed by the entire industry. As is usually the case, what on the surface is a simple scheme, still carries intricacies and detail and we currently await clarification from HMRC.

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