VTAXPER64300 - Particular trades: Catering: Memorandum of understanding on VAT practice in the contract catering industry
[referred to in VTAXPER64100)]
The following memorandum of understanding on VAT practice has been agreed between the Contract Caterers Forum of the British Hospitality Association and HM Revenue and Customs on the application of VAT to the contract catering industry.
1 Scope of Statement of Practice
The issues covered by this statement of practice include, but are not confined to, the following areas:
- the retention of discounts and the legal relationship between manufacturer/wholesaler, contract and the client;
- VAT accounting for free or internal issues;
- the status of the contract caterer as agent or principal or both within the same contract;
- the value of the management service;
- fixed pricing, price capping, performance guarantees and guaranteed subsidy contracts; and
- the scope and application of the wages concession for catering staff.
The principal objective of this statement of practice is to set out a framework within which the contract catering industry will operate and account for VAT, so that:
- contract caterers have certainty over the VAT treatment of all the activities undertaken and can with confidence establish the financial position of each catering unit managed or operated;
- HMRC are assisted in undertaking assurance visits; and
- disputes between HMRC and contract caterers are kept to a minimum.
3 General principles
It is accepted by HMRC that a contract caterer can act in the following capacities:
- as an agent of the client in providing a catering management service, in preparing and serving food and drink to consumers;
- as a principal in its own right supplying the food and drink directly to the consumers, under an agreement with a client who would normally grant the contractor the right to use designated premises or areas and the facilities afforded; and
- as a principal in the purchase of food and drink stocks and other materials and commodities which are first supplied to the client; the contract caterer then acts as an agent of the client in supplying the prepared food to consumers ie, a contract caterer may, under a single contract, operate as both principal (when purchasing food etc) and agent (when supplying it to the final consumer).
The status of the contract caterer will normally fall within one of the categories outlined above. However, any contract caterers who feel that their particular contractual arrangements produce a different result in terms of their status should contact the National Advice Service.
As far as it is practical to do so in the circumstances, the contract caterer’s obligations as agent or principal should be reflected in the wording of any contracts and related proposal/tender documents where they form part of the legal documentation setting out the relationship with the client. However, it should also be accepted by HMRC that it would not be possible to produce “standard” agency and principal contracts due to the number of factors which will influence them. The following are examples:
- documents drafted principally by clients;
- the degree of formality will vary from sector to sector, client to client and contractor to contractor;
- Corporate identity and ethos will be evident in the drafting.
In general it has been established practice that agency contracts are most often used in the education, health and financial sectors.
Under agency contracts for the provision of catering it is accepted that:
- the client makes a taxable supply of catering to the consumer, or the catering is subsumed within an overall exempt supply eg of education;
- VAT is not charged to the client on wages of the catering staff employed at the unit;
- VAT is charged on any management fee plus taxable stock and other services;
- schools and hospitals may only exempt supplies which are closely related to the overall provision of education and health care respectively.
This contributes to fair competition with in-house providers, and the contract catering industry acknowledges the value of that.
Historically principal contracts have been adopted for most other clients, including contracts where total commercial risk is taken on by the contract caterer, eg catering points at public venues and sporting events.
4 Catering Contract - Principal Status
- Control over pricing If the contractor has total control over pricing policy it would be indicative that the contractor is the principal. At the very least the contractor must have some degree of discretion over pricing and quality of service etc. If he is to demonstrate he is a principal. Total dictation by a client could be construed as an indication of an agent contract.
- Lease or licence of premises The contract should demonstrate that the contractor has some form of control over the running of the premises demised. This can be supported by the client granting the contractor a formal lease or a licence to occupy a specific area of the premises (the latter is more likely if a landlord and tenant relationship per the Landlord and Tenant Act 1954 is to be avoided). In addition the contractor might be responsible for insuring the stock.
- Control and ownership of stock The contractor must own all stock at the time of supply to the consumer. However, it should be noted that it is feasible for a client to own stock which is sold to the contract caterer before the time of supply to the consumer under the terms of the contract. The contractor is entitled to move stock freely between various clients’ premises without requiring the client’s permission.
- Free/internal issues Contracts should provide that the contractor will be providing catering services and specific supplies, as requested, to the client (and not to the consumer) exceptionally when free or internal issues are required, with the contractor charging the client for the supplies at the appropriate VAT rate.
- VAT status of parties If not explicitly stated, this should be readily determinable by reference to the contracts, the practical arrangements and the intention of the parties. It is understood that the legal status of the parties will determine their VAT treatment.
5 Catering Contract - Agency Status
- Control over pricing A high level of control by the client over the pricing policy indicates that the contractor is acting as agent (though this is not conclusive in its own right).
- Control of premises Management and control of any premises occupied by the contractor should normally remain with the client. No formal lease, sub lease or licence to occupy would normally be granted, though an exclusive right to provide the catering management services would be granted to the contractor.
- Control of stock If unsold food stock is owned by the client this is indicative of the client being principal; the contractor can only have control over what has not yet been sold to the client. The contract should specify when title passes in the ordinary course of events.
- VAT status of parties The inclusion in the contract of a clause stating that the agent will keep VAT records as agent for and on behalf of the client in respect of the catering service supports the agency status of the contractor.
6 Purchase of food and drink stocks
There are differing practices in the contract catering industry in relation to the purchasing of food and drink stocks under agency contracts. The contract caterer either:
- (i) acts as an agent only in procuring the purchase of food stocks etc on behalf of the client, ie the wholesaler sells direct to the client. This will be supported by the wording of the relevant agreements; or
- (ii) contracts with the client to act as both an agent for the ultimate supply of the prepared meals, snacks etc to the consumer on behalf of the client and a principal in buying from wholesalers and selling to the client all the food and drink stocks.
Agency status for the purchase of food stocks etc in (i) above will be supported if:
- the contracts explicitly state this to be the case;
- contracts and agreements with suppliers and clients might include statements such as ‘the contractor shall purchase on behalf of’;
- discounts directly relevant to the client are available to the clients on whose behalf the contractor acts in placing the orders;
- the client is also entitled to take action against the supplier if poor quality food stocks are supplied;
- it should be noted, however, that aspects of undisclosed agency will mirror principal status. In this case the contract should clearly set out the intention of the parties.
Principal status in the purchasing and selling of food stocks etc in (ii) above will be supported if:
- the contracts explicitly state this to be the case;
- contracts and agreements with food suppliers are with the contract caterer;
- the supply agreement disqualifies the contractor from entitlement to discounts if they buy as agent for a third party, or the discounts are exclusive to the contractor when purchasing in its own name;
- the contract provides for the transfer of ownership of the food stocks, consumables etc to the client prior to preparation and defines the time at which title passes;
- the contractor (and not the client) is entitled to take action against the supplier if poor quality food stocks are supplied.
- until such time as the client takes title to the stock, the contractor is entitled to move stock freely between various clients’ premises without requiring the client’s permission.
7 Specific issues
(i) Wages concession
Where the contractor acts as agent of the client but uses their own staff who are employed solely to serve that particular client and clearly identifies their wages in the profit and loss accounts and/or invoices to the client then, by concession, the contractor may treat the wages as a non-taxable disbursement. It does not apply to any staff who work in respect of more than one client, eg a regional or divisional manager.
This concession applies to contract caterers only in relation to staff employed in restaurants, canteens and dining facilities. It does not cover licensed bars, separate cleaning, security etc. An appointment may be needed for staff on mixed duties.
Catering contractors can receive various types of discount when they purchase consumables. These discounts may be based for example on volume purchases over a period of time, supplier loyalty or product loyalty. The treatment of such discounts will depend on their nature, purpose and on whether the caterer is an agent or principal.
If the contractor is buying food stocks as principal, the retention of any discount should be of no consequence. Essentially, any discount retained by the contractor, whether in whole or in part, will represent or increase the contractor’s profit on the sale of the goods concerned. Where those goods are then sold to a client, the consideration will be taken to be the actual amount paid by the client.
If the contractor is buying food stocks on behalf of the client as agent the discounts would be expected to be passed back to the client. If there is provision within the contract for the contractor to retain the discount it is further consideration for the management service and subject to VAT at the standard rate.
Payments, described as discounts, which are received direct from manufacturers or producers, rather than from the wholesaler from which the consumables were purchased, may represent consideration for a supply to the manufacturer/producer, in which case, they will be taxable at the standard rate.
(iii) Advance payments
Advance payments may be received by the contract caterer from the client. Where they are to form part of the consideration for the contract caterer’s supply they create a tax point for VAT purposes when they are received. This can include advance payment of the subsidy due from the client under a principal contract, or an advance of the contract caterer’s management fee under an agency agreement.
Under an agency agreement the amount received might include an element which is not subject to VAT. The contract caterer may therefore need to agree with HMRC the basis on which the VAT liability is to be calculated in such circumstances.
Any payments made by clients as a deposit, refundable to the client on termination of the contract, as a “float” to provide cash flow is not consideration for any supply.
(iv) Tax points
It is standard practice for contractors to invoice on a 4 or 5 weekly basis for all purchases and sales in that period. Goods purchased by the contractor in that period are sold to the client, notwithstanding that it may not have been consumed. [Note: any reference to “total consumption in the period” in typical 4/5 weekly statements and VAT invoices means stock purchased for use in the client’s canteen etc.]
Although the basic tax point is the date of delivery of the stock to the client’s premises, the supplies are not invoiced or paid for (apart from any deposit - see (iii) above) and VAT accounted for until the 4/5 weekly invoice is issued. Contract caterers will need to obtain written approval from Customs for monthly invoicing to permit the tax point to be linked to the issue of the invoice covering the 4/5 week period or to the end of the period.
(v) Free/internal issues
Free or internal issues arise when a contractor is required to provide any meals, snacks or beverages outside the normal catering arrangements and usually there is no cash paid. For example a meal may be provided at a function, special event or on client entertaining, usually at the client’s specific instruction or to order. Similarly, clients’ staff (or certain grades of staff) may receive free meals or refreshments.
Under principal contracts, the contractor will invoice the value of the supply of catering at an agreed price and VAT will be charged on that full value. Under agent contracts, the contractor is providing the meal, beverages etc as agent for the client. Therefore, VAT will be charged by the contractor on the supply of services to the client, and where food and other items are supplied to the client, such items of food, drink etc which do not qualify for zero-rating (ie this is not a supply of catering).
In either case it will be the client’s responsibility to determine the extent to which they may reclaim as input tax the VAT they have been charged.
(vi) Price capping and performance guarantees etc
Some contracts include price capping or guaranteed price conditions that limit the costs to be incurred by the client. This can apply to both principal and agency contracts and is therefore not in itself determinative of the status of the contract caterer.
It can also be achieved in a number of ways. The overall amounts to be paid by the client, either by way of subsidy in the case of principal contracts or management fee where the contract caterer is acting as an agent, may be fixed in advance. Alternatively it may involve the payment of a rebate to the client at the end of a specified period. In most cases the payment of a rebate will represent a reduction in the consideration for the contract caterer’s supply to the client. Normal VAT credit note procedures will therefore apply to any adjustments, including the option under which both parties may agree not to adjust any VAT previously accounted for.
Contractors affected by this and who require further guidance, for example where the rebate includes consumables subject to mixed rates of VAT, may contact their local VAT office.
(vii) Profit share
If a contractor acting as a principal under the contract is obliged to pay a proportion (or all) of any operating profits to the client, its VAT treatment will be determined by how it is characterised in the agreement.
If a contract caterer acting as an agent receives a share of any profits realised it is likely to represent additional consideration for the contract caterer’s supply of agency services and will be taxable at the standard rate.
(viii) Vending machines
The status of the contractor under the contract will determine which party is liable to account for any VAT due on sales made from vending machines.