Andrew Needham looks at the liability of subsidised or free meals for staff and the recovery of input tax.
If you provide a canteen for staff then VAT is due on what you actually charge for the meals, etc. If a business charges the market rate, then VAT would be due in the normal way. However, if a business provides subsidised or free meals to staff then VAT is still only due on the actual monies received. This means that no VAT is due on catering supplied free to staff, and is only due on what the staff actually pay for a subsidised meal.
Even if catering is provided free to staff, any associated input tax is fully recoverable (assuming that the employer is not partially exempt) as a legitimate business expense.
Trap:
Where employees pay for meals, etc., under a salary sacrifice arrangement, following the judgment of the CJEU in Astra Zeneca (Case C-40/09), from 1 January 2012 employers must account for VAT on the value of the supplies, unless they are zero-rated. Subject to the normal rules, the employer can continue to recover the VAT incurred on related purchases.
Salary deductions
In the case of RW Goodfellow and MJ Goodfellow (MAN/85/0020) the Tribunal held that deductions made from an employee's wages to take account of catering and accommodation paid in accordance with the Wages Order in force for the industry could not be regarded as monetary consideration and no VAT was due.
Businesses should be careful to distinguish between a contract of employment, such as in the above Tribunal case where no VAT is due, and any agreement between employer and employee whereby a deduction from salary or wage is specifically related to a supply of catering and VAT is due.
Where deductions are made other than under a contract of employment, the value of the supply is the amount deducted. HMRC argue that deductions made from an employee's wages to take account of catering and accommodation amount to monetary consideration, and that the amount of the deduction was therefore liable to VAT.
Vending machines
In other commercial situations, employers may provide free or subsidised meals or catering in another form, such as drinks or food from a vending machine.
If a business installs vending machines for its employees to use free of charge and it gives them tokens to operate the machine or it is operated without tokens or coins, no VAT is due on the supplies from the machine.
Trap:
If a business gives its employees money, or they have to pay for tokens to operate the machines, the supplies are standard rated and the business must account for VAT on them.
Restaurants and hotels
If the proprietor of a restaurant, café or other catering establishment supplies themselves or their family with meals, this is not regarded as catering, and they need not account for VAT on those meals.
However, they must account for tax on the full cost to the business of any standard rated items (such as ice cream, sweets and chocolates, crisps, soft and alcoholic drinks) that they take out of their business stock for their own or their family’s use.
If an employer provides staff with free meals or accommodation in the establishment, for example a night manager, no VAT is due.
Practical Tip:
If you provide your staff with meals or accommodation you only have to account for VAT on the amount paid, so if they are supplied free no VAT is due. Any input tax incured can be recovered as a legitimate business expense.
