Chinese restaurants and VAT
The goods and services supplied by your business will be taxable for VAT purposes and you must register for VAT once your sales have reached the current VAT threshold. You will have to charge VAT on your sales of meals and drinks - this is known as 'output tax'. You will be able to reclaim any VAT you pay on purchases - this is known as 'input tax'.
There are two main rates of VAT:
- standard rate (currently 20%)
- zero rate
Some goods such as fuel for domestic use are subject to a reduced rate, currently 5%.
Every quarter you will pay HM Revenue & Customs (HMRC) the difference between:
- the output tax you have charged, and
- the input tax you have paid on your purchases
Nearly all businesses have to pay their VAT bill electronically - for example by direct debit or online banking. HMRC allows you some time at the end of each quarter before you have to pay the VAT due. So, for example, the VAT due on sales made in months one, two and three would be paid at the end of month four. Your VAT return will show your payment deadline date.
Businesses that are having trouble making their VAT payments, or are worried that future payments will cause them problems, can ask for help from the HMRC Business Payment Support Service. If your business needs this financial assistance to tide it over, HMRC will look at your situation and discuss temporary options that could help out. These could include letting you make payments over a longer period and waiving late payment surcharges. To discuss payment problems with HMRC you can call the Business Payment Support Service Helpline on 0300 200 3835.
Standard rated supplies
Most of your supplies will be standard rated, for example:
- food and drink to be consumed on the premises where it is sold (including any outdoor seating area)
- hot take-away food and drink
- alcoholic and soft drinks
- tobacco products
- food and drink supplied for functions and so on
Zero rated supplies
Supplies of food and drink made in the course of catering are standard rated, but if food is supplied on which the customer has to do further preparatory work before it can be eaten, then this can be zero rated. In most cases this won't apply to Chinese restaurants and take-aways.
You can consult the VAT Helpline on 0300 200 3700 if you need guidance. You can also download helpful free publications, including VAT Notice 700/1 Should I be registered for VAT? and VAT Notice 709/1 Catering and take-away food, from the Gov.uk website.
HMRC will also be able to advise you on using one of the Retail Schemes. These schemes are used by businesses which deal mainly with members of the public.
Working out the VAT
Your market research will have helped you to estimate your sales income every month, including VAT. Now estimate approximately how much VAT you will pay every quarter.
Your sales will generally be standard rated, so for convenience you can assume that the total of three months sales income would include VAT at 20%. To calculate the amount, multiply your three months sales total by the VAT fraction 1/6.
This will give you the figure for output tax due. You can take away from this the VAT you will pay on your purchases. Many of the payments you make during each three month period will include VAT at the standard rate, but for the sake of simplicity just look now at the payments you have estimated for 'Payments to suppliers' and 'Cash purchases'. Purchases of food for your catering activities will generally be zero rated, so exclude from your three months costs figures the amount you have estimated you will spend on food. Now multiply your three months costs total by the VAT fraction 1/6.
This will give you the figure for input tax, which you can now deduct from the output tax figure. The balance goes in the cash flow at quarterly intervals.
Making Tax Digital (MTD) for VAT
Under HMRC's Making Tax Digital initiative, VAT-registered businesses with taxable turnover above the VAT threshold must keep records digitally and use special software to submit their VAT returns. You can find out more about MTD on the Gov.uk website.
Alternative flat rate scheme
You might be interested in an optional flat rate scheme (FRS) for eligible small businesses. Under this scheme you continue to issue tax invoices to VAT registered customers, but the VAT payable every quarter is calculated as a percentage of your VAT-inclusive turnover. You apply the appropriate flat rate percentage for your type of business. However, this scheme cannot be used with the retail schemes, the margin scheme for secondhand goods or the cash accounting scheme. You can find full details of the FRS, who can use it, and the flat rate percentages in VAT Notice 733, Flat rate scheme for small businesses. It will help you to decide whether or not the scheme is suitable for you.