Tax issues for pop-up restaurants
Pop-up restaurants have become a vibrant and exciting part of the UK culinary scene. They offer food enthusiasts a chance to savour unique, innovative, and often gourmet meals. This trend has gained considerable momentum in recent years. If you're thinking of starting a business in this sector, then it's essential to understand the tax issues for pop-up restaurants .
What do we mean by a pop-up restaurant?
A pop-up restaurant is essentially a temporary dining establishment operating for a limited time in a temporary location. It often features a unique and innovative menu, theme, or concept, providing a novel and limited-time dining experience for customers. Typically Pop-up restaurants are known for their spontaneity and can appear in unconventional settings - for example vacant storefronts, music festivals, or even private homes.
Tax issues for pop-up restaurants - overview
The usual accounting and tax rules apply to pop-up restaurants, though there are VAT considerations which we'll cover later on in this article.
Is it a hobby or a trade?
You'll first need to consider whether you are operating your pop-up restaurant as a hobby or as a trade. You can apply HMRC's badges of trade as a guideline.
This is important because if HMRC accept you are operating a pop-up restaurant as a trade this will impact on how you claim tax relief on any losses incurred when you first start trading.
Operating your business as a sole trader or partnership enables you to potentially obtain sideways loss relief. If you are able to claim sideways loss relief you can set off trading losses from your pop-up restaurant against your other income. A successful claim can often result in a tax refund which can prove invaluable to your business cashflow.
However you will not be able to obtain sideways loss relief if HMRC consider you are operating an 'uncommercial trade' (a hobby). Instead, any losses must be carried forward to use against any future profits made from the 'uncommercial trade'.
VAT issues
VAT is also an important area of the tax issues for pop-up restaurants that needs to be considered.
VAT registration
If the pop-up restaurant is your only business, you will need to register for VAT only if your sales exceed the VAT registration threshold (currently £85,000).
There may be a cash-flow benefit to voluntary registration if your sales are below the threshold as you can potentially reclaim VAT on stock purchases which are usually a significant overhead.
Accounting for VAT on sales
Typically turnover will consist of food and drink sales - including takeaways, catering services, providing pop-up vehicles to events such as music festivals or weddings plus 'on the door' fees for other special events.
For VAT purposes, there is a distinction between hot food, cold food, and food which is consumed on or off the premises.
Items supplied in the course of catering, including hot food consumed on the premises, are standard-rated for VAT purposes.
However those Items supplied for consumption off the premises and some (but not all) cold food and drink which is not on the list of exceptions, are zero-rated as food.
Business splitting
When a business is artificially split into two in order to avoid a VAT registration, this is known as disaggregation and HMRC may treat both as a single business for VAT purposes.
If you do have other catering businesses you need to be aware of these rules. Even though the turnover for your pop-up and/or café/restaurant in isolation may be below the VAT threshold, if the businesses meet the above conditions, HMRC may treat them as a single business for VAT purposes.
Flat Rate Scheme
If you're running a pop-up restaurant, you can also take advantage of the VAT Flat Rate Scheme to simplify admin.
Put simply, under the Flat Rate Scheme ('FRS') a flat VAT percentage is paid on VAT-inclusive turnover. You choose your FRS percentage: based on your main activity. In the case of a pop-up restaurant this falls under catering services (including restaurants and takeaways) and the relevant percentage is 12.5%. Additionally, a 1% reduction on the FRS VAT rate applies for the first year of VAT registration.
However if you're registered under the FRS you can only claim VAT on specific costs prior to registration, not an ongoing basis after VAT registration. For this reason, if you have significant overheads and suffer a lot of VAT on these costs, this scheme may not prove beneficial for you.
Vouchers, discounts and loyalty cards
Many coffee shops offer loyalty and reward schemes in a variety of different formats.The VAT implications may vary depending on the type of scheme offered and the rules changed on 1 January 2019. This is an area we will cover in more detail at a later date.
Staff working at your pop-up restaurant
If you're not sure whether you or your workers are employees, you should check their status and use HMRC's employment status tool if appropriate. We would mention that if they are on a zero-hours contract this indicates that mutuality of obligation is agreed by the parties. This is one of the indicators that an individual working in your business is an employee, not a freelancer.
If your staff receive tips, these are taxable. How these are taxed and whether they are subject to National Insurance depends on how they are received. Again this is an area which we'll cover in more detail in a future article.
Summary
We would stress the above guidance is not exhaustive, It represents just some of the key tax issues you need to consider when first starting your pop-up restaurant business.
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.