How much VAT should you charge on festive goods?

Mixed supplies

Suppose that your business sells a bundle of goods as part of a Christmas package, and some of the goods are either zero-rated or subject to 5% VAT. For example, you might sell a hamper that consists of many food and drink items; some of them will be zero-rated, such as grocery items and cakes, but many will be subject to 20% VAT, e.g. wine, chocolates, soft drinks. In such cases, you should apportion output tax on your selling prices to reflect the different rates, and there are two main methods:

Individual selling prices. If your business sells all items on a standalone basis, you can apportion your output tax based on these individual prices.

Cost basis. Alternatively, you can use a cost-based method, calculating output tax based on the price you paid for the goods.

 Either method is acceptable, as is any other method, as long as it gives a fair and reasonable result in terms of the output tax payable on each sale. HMRC does not have the power to prescribe a specific method.

If an officer thinks you have underpaid VAT, they have the power to issue a “best judgement” assessment. It is therefore important to stand back and check that your calculations are fair and logical to avoid a potential problem.

Don’t forget the packaging

Many festive goods include packaging which has a value to your customers in its own right. You must include the value in your apportionment calculations in the following circumstances:

• the packaging is clearly designed to be retained by your customer for future use
• it is “more than is required” to serve the goods in question; or
• the packaging has a secondary use which will benefit the customer in the longer term, such as cups or glasses.

Example. Grocer Gail sells a festive product which consists of luxury biscuits packaged in an engraved ceramic container. This is a mixed supply of zero-rated biscuits and standard-rated packaging because the container has a clear value and future use to her customers.

HMRC’s published guidance accepts that fancy jars and containers are accepted as normal packaging in most cases, unless it is clear that they are intended to be kept for future use. However, Kilner jars are standard-rated because they are heavy duty jars with wired lids that are used for preserving food.

Business splitting?

Consider a business that intends to buy and sell Christmas trees during the festive period as a new venture; they are currently registered for VAT and trade as a restaurant. There is scope to create a new legal entity for this activity so that sales can be made without charging VAT, i.e. the total sales of the new entity will be less than the compulsory registration limit.

HMRC has the power to prevent business splitting if two businesses are closely connected, so it is important that the owner keeps the new activity completely separate to the restaurant, i.e. separate bank accounts, supplier accounts, record keeping etc.