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HMRC internal manual

VAT Taxable Person Manual

Particular trades: Catering: Catering contractors operating as an agent in non-commercial establishments

Some clients wish to maintain control over the catering facility, without necessarily being involved in the day-to-day operation. As a result a catering contractor may be appointed to provide the catering on behalf of the client.

In such circumstances it is common for the agreement or invitation to tender to talk of the client ‘inviting the contractor on to the premises’, or asking the contractor to ‘manage and administer the facilities’ on their behalf. Typically, the client will provide the kitchen and equipment, and any charge made to the contractor for this will be nominal or certainly not economic. The client will normally set the prices, and insist upon authorising certain types or volumes of expenditure. It is thus the client who ultimately will make a profit or loss.

There are two further aspects that may need to be considered in these circumstances.

1. Staff charges

Contractors acting as agent of the client may use their own staff, in which case the set fee charged to the client will often be divided into staff wages and a management charge. Provided the contractor pays the wages of its own staff who are employed solely to serve that particular client and clearly identifies their wages in profit and loss accounts and/or invoices to the client, the staff wages element may, under the terms of the ‘catering staff wages concession’, be charged to the client without the addition of VAT. However, output tax will remain due on the remainder of the management charge. This is a specific concession which applies only to catering contractors, and coverage only extends to restaurants, canteens, and similar dining outlets. Other activities, such as bars and house-keeping duties, do not qualify. See also paragraph 7(i) of VTAXPER64300.

By contrast, a contractor who acts as an agent will sometimes use staff who are employed by the client. Here, if a payment from the contractor to the client can be clearly identified (for example by contractor agreeing to pay the wages of the staff), then there is a taxable supply of staff from the client to the agent. However, more often than not, the charges for the catering contractor’s services to the client will be reduced from the outset to take into account the fact that the owner is providing the staff; and there will be no VAT consequences.

2. Discounts

Catering contractors often negotiate bulk discounts with their suppliers. Normal practice should be for the contractor to pass them on to the client. Where, however, the agreement allows the contractor to retain any discounts this represents further consideration and so the amounts retained form part of the value of the standard-rated supply of agency services to the client by the contractor.

PBK Catering (LON/91/2688Y) considered whether discounts retained by the catering contractor were further consideration for supplies of agency services to the owner. The tribunal held that they were, as in reality the contractor, acting as agent, had made one supply of catering services. PBK’s argument that they purchased the foodstuffs as principal but acted in all other respects as an agent of the owner was rejected as an artificial and convoluted analysis.