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HMRC internal manual

VAT Food

Excepted items: catering: secondary catering issues: supplies of meals to employees

It is common practice in businesses such as hotels and restaurants for employees to be given free meals. In other commercial situations, employers may provide free or subsidised meals or catering in another form such as drinks from a machine.

Paragraph 10 of Schedule 6 of the VAT Act 1994 specifically refers to the provision of food and drink in the course of catering by an employer to an employee. Where such supplies are made, the value of the supply is the monetary consideration alone, if any, paid by the employee. This has several consequences.

  • Where an employee pays for a meal, snack or drink, the supply is standard-rated and the value of the supply is the amount paid.
  • Where an employee is not required to pay for a meal, snack or drink the value of the supply is nil and no VAT is due.
  • Where employees pay for meals and so on under a salary sacrifice arrangement, following the judgment of the CJEU in Astra Zeneca (Case C-40/09), from 01/01/2012 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.
  • Where deductions are made other than under a contract of employment, the value of the supply is the amount deducted.

This problem was highlighted by the RW Goodfellow and MJ Goodfellow (MAN/85/0020) tribunal. Here, HM Customs and Excise argued that deductions made from an employee’s wages to take account of catering and accommodation amounted to monetary consideration, and that the amount of the deduction was therefore liable to VAT.

The tribunal disagreed, ruling that because employees in this case were paid in accordance with the Wages Order in force for the industry, and the amount of the deduction was set out in that order, then it could not be regarded as monetary consideration.

Paragraph 10 of Schedule 4 of the VAT Act 1983 (now Schedule 6 of the VAT Act 1994) therefore applied, and no VAT was due.

You should be careful to distinguish between a contract of employment, such as in the above tribunal, and any agreement between employer and employee whereby a deduction from salary or wage is specifically related to a supply of catering. Examples would be where there is a periodic payment for meals, or where, should the recipient be on leave or sick, there is no deduction. In these circumstances, our view is that the deduction is monetary consideration, and that the amount deducted is liable to VAT.

Please remember that the valuation provision under Schedule 6 applies only to supplies in the course of catering (and to the provision of accommodation in hotels, inns and such like). For other supplies of goods, such as grocery items, Christmas hampers, or bottles of drink, which an employer might provide for an employee, you should apply the normal VAT rules relating to gifts.