Pubs get food tax warning

A Wigan tenant has been ordered to pay about £20,000 in backdated VAT payments after tax inspectors re-defined his pub as a "restaurant" following a refurbishment.

The case serves as a warning for licensees who want to sign up to the Flat Rate Scheme for Small Businesses, especially if they want to expand their food offering prior to next summer's smoking ban.

Tony Morgan of Admiral Taverns' Harrow Inn had been paying VAT of 5.5% of turnover - the level that applies to pubs under the Flat Rate Scheme, which was introduced to simplify VAT calculations.

A number of pubs have signed up to the scheme because it is easier than paying 17.5% VAT and claiming the income tax back.

But when tax inspectors visited the Harrow Inn last summer, they insisted on 12% VAT - the level for restaurants.

Under the Flat Rate Scheme, businesses that could fall into two categories must be placed in the sector where the greater proportion of turnover is generated.

Inspectors put the Harrow Inn in the restaurant category because they expected food sales to top wet sales following a £20,000 refurbishment.

Morgan appealed and argued that turnover was "more or less equally divided" between bar and food sales before they joined the scheme.

But the tribunal chairman said that excuse was "exhausted" at the end of September 2004, about a year after the refit, when Morgan should have reviewed projected turnover for the following year.

Morgan told the MA he thought wet sales would still be greater than food sales after the re-fit, which was focused on the bar area.

Federation of Licensed Victuallers Associations chief executive Tony Payne advised licensees to continually review their food and drink sales or risk paying more VAT.

"A lot of licensees will be caught out by this if they are not careful," he said.