Licensees serving food could face huge tax hike

Licensees introducing food into their pubs could find themselves slapped with a huge price hike for VAT.

The ruling of a recent tribunal case against Mr and Mrs Morgan of the Harrow Inn, Wigan found that as their pub is now serving more food than drink it was liable to a higher tax band if they are using the flat rate tax scheme.

Under the flat rate scheme for small businesses pubs pay a tax rate of 5.5 per cent while catering establishments pay 12 per cent.

Many small businesses operate under the flat rate scheme as it is simpler than paying 17.5 per cent and claiming back income tax. It is available for businesses whose annual taxable turnover (not including VAT), does not exceed £150,000 and whole total turnover does not exceed £187,500.

Licensee Tony Morgan was disappointed by the news. "I owe them slightly under £20,000. We are going to try and pay them on a monthly basis.

"Being a small business the scheme had worked for us but this ruling is going to catch out a lot of licensees."

The case could have knock on effect for licensees who are trying to build up their food sales in the wake of an impending smoking ban. Licensees are being warned they must track their food to drink sales on an ongoing basis or they could face a shock tax bill at the end of the financial year.

Tony Payne, chief executive of the Federation of licensed Victuallers' Associations, is asking the government to consider taxing drink and food separately so that licensees can pay 5.5 per cent on their drink sales and 12 per cent on food.

He said: "Now when your turnover on food is higher than drink you count as catering services.

"With a smoking ban coming in there will be a lot more publicans looking at food.

"This could affect a lot of licensees."

For advice and help on deciding on a sector go to www.hmce.gov.uk/business/services/vat-flat-rate.htm