Zero-Rated VAT Expenses You Never Knew About: Hidden Savings in the Hospitality Industry

When it comes to VAT in the hospitality sector, the conversation usually centres on the need to reduce the standard 20% rate most businesses are required to charge on sales, especially after the temporary 5% relief introduced during the pandemic. But did you know that certain expenses can actually be zero-rated, even within the complex web of VAT rules? If you're running a hotel, restaurant, pub or catering business, understanding these zero-rated VAT expenses could mean real savings in the prices you can offer to customers and ultimately to your bottom line.

In this article, we explore some of the lesser-known VAT exemptions for hospitality that we often recommend to our accounting clients. 

What Does "Zero-Rated" Really Mean?

Before diving into specific examples, let’s clarify the term. In the UK, zero-rated VAT means goods or services that are taxable at 0%. Unlike exempt items, these are still VAT-taxable, which means you can reclaim input VAT on related costs. This distinction matters - especially when you're trying to reduce your VAT on business expenses.

The good news? A number of everyday costs within the VAT hospitality industry may fall into this category. 

Common (But Often Overlooked) Zero-VAT Hospitality Expenses

HMRC outlines clear rules for what qualifies as zero-rated. While you’re likely already aware that most cold food and non-alcoholic drinks sold for consumption off-premises are zero-rated, here are a few more examples that often fly under the radar:

1. Basic Foodstuffs for Preparation

Most unprocessed food items intended for human consumption are zero-rated. This includes:

• Raw meat and fish
• Vegetables and fruits
• Cereals, nuts, and pulses
• Culinary herbs and spices

These items remain zero-rated whether supplied directly to consumers or used as ingredients in food preparation.

HMRC Guidance: Food products (VAT Notice 701/14)

2. Takeaway Cold Food and Non-Alcoholic Drinks

Cold takeaway food and non-alcoholic beverages are generally zero-rated, provided they are not consumed on the premises and are not of a type that is always standard-rated (more on this below). The list of zero-rated items includes:

• Cold meals such as sandwiches and salads
• Cold pastries such as croissants
• Fresh fruit
• Iced coffee, iced tea and milkshakes
• Condiments such as ketchup and mayonnaise

However, there are some cold takeaway items that are always standard-rated (20% VAT). These include:

• Alcoholic drinks such as beer
• Confectionery such as sweets
• Crisps and savoury snacks
• Sports drinks such as Red Bull
• Ice cream
• Soft drinks such as Coca Cola
• Mineral water 

Source: HMRC VAT Notice 709/1: Catering and Takeaway Food

3. Meal Deals & Other Mixed-Supplies VAT Deals

Another thing to bear in mind is how claiming VAT works when you are selling a food deal that includes both zero-rated and standard-rated VAT items? These types of transactions are known as mixed supplies for VAT.

Let’s say you offer a takeaway meal deal that includes a sandwich, a bottle of water, and a pack of crisps for a total price of £4.50. Individually, the sandwich sells for £3.00, the water for £1.00, and the crisps for £1.00, meaning the customer saves £0.50 on the meal deal.

The VAT treatment is as follows:

• Takeaway sandwich: Zero-rated
• Bottled water: Standard-rated (20%)
• Crisps: Standard-rated (20%)

You’ll need to apportion the £4.50 based on the value of each item (taking into account the meal deal discount), ensuring the VAT is calculated correctly on the standard-rated elements.

For example, you might allocate:

• £2.70 to the sandwich (zero-rated)
• £0.90 to the bottled water (standard-rated – 20% VAT)
• £0.90 to the crisps (standard-rated – 20% VAT)

That means £1.80 of the total is subject to VAT (£0.36) , and the remaining £2.70 is zero-rated.

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4. Printed Promotional Materials

Leaflets, menus for takeaway services and printed flyers are often zero-rated, as long as they meet HMRC’s guidelines for printed matter (i.e., for advertising purposes only, not laminated, not intended to be written on). Many hospitality businesses miss this detail and wrongly treat printing costs as standard-rated.

Source: HMRC VAT Notice 701/10: Zero Rating of Printed Matter

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5. Sanitary Products

Since 1 January 2021, most women's sanitary products have been zero-rated for VAT. This includes items such as sanitary towels, tampons, and menstrual cups. Additionally, from 1 January 2024, reusable period underwear (commonly referred to as 'period pants') has also been zero-rated

HMRC Guidance: VAT on Women's Sanitary Products (VAT Notice 701/18)

6. Mobility Aids and Accessibility Equipment

Certain mobility aids and equipment designed for disabled individuals are zero-rated for VAT. If your business invests in such equipment to improve accessibility, these purchases may qualify. Examples include adjustable beds, stair lifts, hoists, and sanitary devices.

HMRC Guidance: Reliefs from VAT for Disabled and Older People (VAT Notice 701/7)

7. Service Charges

Whilst any food served on your premises will have the standard rate of VAT applied, this is not the case for any discretionary service charges such as tips, which are zero-rated.

Note the use of the word ‘discretionary’ in this terminology. Basically if the customer chooses to leave a tip, this is zero-rated for VAT purposes however if this is a mandatory service charge applied as default on the customer’s bill, it will still be liable for standard VAT charges.

Source: HMRC Guidance on Gratuities

VAT Exemptions Relevant to Hospitality

As well as these Zero-rated VAT items, there are a number of VAT exemptions hospitality businesses should be aware of. It's important to distinguish between zero-rated and VAT-exempt items:

• Zero-rated items: VAT is charged at 0%, and businesses can reclaim input VAT.
• Exempt items: No VAT is charged, but businesses cannot reclaim input VAT related to these supplies.

Common VAT-exempt areas include:

• Financial Services: Transactions like insurance and certain banking services.
• Educational Services: Some training and educational courses.
• Healthcare Services: Medical treatments provided by registered professionals.

HMRC Guidance: VAT Guide (VAT Notice 700)

Best Practices for Managing VAT on Business Expenses

It’s important that your business maintains compliance and optimises VAT recovery by following these steps on an ongoing basis:

• Maintain Accurate Records: Keep detailed invoices and receipts for all purchases.
• Regularly Review VAT Codes: Ensure that your accounting software uses the correct VAT codes for different types of expenses.
• Consult HMRC Guidance: Regularly check HMRC's official VAT notices for updates relevant to the hospitality sector.

Need Help with VAT Management for your Hospitality Business? We Can Help!

Staying informed about zero-rated VAT expenses and exemptions is crucial for hospitality businesses aiming to manage costs effectively. Regularly reviewing HMRC guidance and consulting with tax professionals can help ensure compliance and financial efficiency.

If you need further assistance or have specific questions about VAT in the hospitality industry, Linggard and Thomas can help. We are specialist accountants for the hospitality industry that provide a range of services including VAT compliance, meaning we understand the specific financial challenges and opportunities for businesses operating in this industry.

Get in touch today to see how we can empower your business to succeed with smarter finances.

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