Thankfully, it’s simpler to grasp than most people would think. (Honestly!)
Our jargon-busting guide will answer five key questions:
- What actually is VAT?
- Does my pub need to be VAT registered?
- How much VAT will I need to pay?
- How does the VAT return work?
- Is flat-rate VAT – the easiest accounting option – for me?
“What actually is VAT?”
VAT stands for Value Added Tax. Essentially, it’s a tax on sales. It must be added on to the value of goods and services by VAT registered companies.
In the majority cases, pubs will have to be VAT registered and so the food and drinks you sell will need VAT added onto it.
(Basically VAT is compulsory when your business starts bringing in a certain amount of money but we’ll explain in more detail in the following section).
From the perspective of the consumer, it’s a tax on the product they’ve purchased.
However, as well as charging VAT onto your products, you’ll likely find yourself buying items for your pub (fixtures, fittings etc) which include a VAT charge. You can reclaim this amount in your VAT return.
So, it’s not all doom and gloom!
Remember: businesses MUST account for VAT if they are VAT registered.
Let’s answer the first key question…
“Does my pub need to be VAT registered?”
Yes is the most likely answer, but it depends on your turnover.
The term ‘turnover’ refers to the money which your business makes. Think of it as raw incomings.
(It’s not the same as ‘profit’ which is worked out by subtracting the money your business spends.)
* As of April 1 2017, if your business has a turnover of £85,000 or more, during any 12-month period, you must be registered for VAT. Most pubs will have a turnover above this threshold.
Alternatively, you can register voluntarily for VAT if your pub’s turnover is less than £85,000. In certain scenarios it provides a tax benefit.
Taking over a pub from a previous owner: If you take over a pub from a previous owner, you must find out the takings for the 12-month trading period prior to your tenure. This will enable you to work out if you should be paying VAT.
A new owner and a new business name doesn’t result in a clean slate as far as VAT calculations are concerned.
Fluctuating turnover: Of course, turnover can rise and fall. Your pub’s earnings might start below the VAT limit, but then begin picking up until they break the £85,000 marker.
If that happens you must register for VAT within 30 days. Otherwise, you will end up having to pay the VAT you owe from the time you should have registered. You may also incur a fine from HM Revenue and Customs (HMRC).
An important note for the self-employed: If you’re running a pub as a sole trader or partnership, and you have earnings from other self-employed activities, these have to be added together as a lump sum.
So, let’s say your pub takes in £75,000 over a 12-month period. Then, via separate self-employed activities, you make a further £12,000. Your self-employed earnings now total £87,000 and that means you must be registered for VAT.
Read HMRC’s guidance on VAT registration.
“How much VAT do I pay?”
- Standard rate: 20%
- Reduced rate: 5%
- Zero rate: 0%
In practice, pubs operate at the 20% Standard Rate of VAT.
That’s because the tax rules dictate that all food and drink consumed at restaurants, cafes and pubs is taxable as such.
There is no difference between alcoholic and non-alcoholic drinks, or between bar snacks and hot meals – they all attract 20% VAT.
In theory, it’s possible to create a cold food menu which is sold as takeaway only thereby avoiding VAT. However, it would likely end up a tiny proportion of sales and hardly worth the bookkeeping hassle.
An example of how standard rate VAT will work for running a pub:
- Let’s say you’re buying beer from your brewery at a rate of £2/pint.
- You want to make a profit of £1.50 per pint, which puts the price up to £3.50.
- But then you need to add 20% onto the cost to cover VAT.
- 20% of £3.50 equals 70p. That leaves the the over-the-counter price at £4.20 per pint.
That 20% you added onto the price is known as your ‘output tax.’
However, if you make any purchases for your pub business which include VAT then – as a VAT registered operation – you can claim that back in your VAT return. That’s known as your ‘input tax.’
As an example, let’s say you purchase a set of tables from a VAT registered company. Anything you buy from them will include VAT at 20%. If you pay £200 for these tables, inclusive of VAT (and that should be marked on the receipt) then you’ve paid out £33.33 in VAT.
When it comes to doing a VAT Return, you subtract the VAT you pay from the VAT you charge.
A small-scale example of a VAT return calculation:
- You have charged VAT totalling £1000 to your customers. (Your output tax.)
- You have been charged £100 of VAT for fixtures and fittings you’ve bought for your pub. (Your input tax.)
- For your VAT return you need to delete your output tax from your input tax: £1000 – £100 = £900.
- £900 is the amount of VAT you need to pay to HMRC.
“How do I submit a VAT return?”
You must submit a VAT Return (assuming your are VAT registered) to HMRC every three months. This period is known as your ‘accounting period.’
The VAT Return records things for the accounting period like:
- Your total sales and purchases.
- The amount of VAT you owe.
- The amount of VAT you can reclaim.
- What your VAT refund from HMRC is.
Even if you have no VAT to pay or to claim, you must still send a VAT return. Your VAT return must be filed online.
When you create an online VAT account with HMRC you will also receive reminders for when your return is due, which is helpful.
A small word of warning…
It’s vital that you keep up with your bookkeeping responsibilities. If your records are inspected and they aren’t in order, you may receive a fine.
To see a complete breakdown of what you need to do, check out HMRC’s summary of your record-keeping responsibilities.
“Is flat-rate VAT – the easiest accounting option – for me?”
Flat-rate VAT is a simplified way of paying VAT and is available to pubs with a turnover of less than £150,000. Over the course of each three-month accounting period you pay HMRC a fixed percentage of your total income.
The percentage varies depending on the industry. For pubs it is currently 6.5%.
So, all you have to do is add up all your takings for the three-month accounting period and then give 6.5% of it to HMRC.
A potential drawback is that you might end up paying more VAT than you otherwise would. That’s because you won’t be able to claim back VAT on the goods or services you buy for your pub.
Heating and electricity will likely be among your most significant ongoing VAT expenditures.
In other words, you need to estimate the difference between how much VAT you charge and how much you will be able to claim back, in order to work out whether the flat rate VAT for pubs will be best for your business.
Read more detailed advice about the flat rate scheme on HMRC’s website.
Here at Pub Landlord Advisor we offer the latest business advice for soon-to-be publicans. Need advice on the best legal structure for running a pub? Check out our guide to sole trader, partnership, limited liability and limited liability partnerships.