Food processing services (VAT Notice 701/40)
Check the VAT rules for food processing and abattoir services.
Details
This notice cancels and replaces Notice 701/40 (January 2002).
1. Food processing services
1.1 What’s changed
With effect from 1 April 2008 the Agriculture and Horticulture Development Board (AHDB) was set up and as part of its role it undertakes the work previously carried out by the Meat and Livestock Commission. Sections 5 and 6 of this Notice have been updated to reflect that change.
1.2 What this notice is about
This notice explains the VAT rules for food processing services, including abattoir services. Also included are details of the tax treatment of Agriculture and Horticulture Development Board levies relating to the meat industry. Further information on associated subjects can be found in Notice 701/14 Food and Notice 701/15 Animals and animal food.
1.3 General principles
The processing of someone else’s goods is a supply of services, and if that process produces new zero-rated goods it is zero-rated.
New goods are produced when a process alters the essential characteristics of the goods. Where the process does not produce new goods, or the goods are not zero-rated, then the process is standard-rated. In these cases VAT is due on the charge for providing the processing service.
1.4 When new goods are produced
The following may help you decide if new goods are produced:
- size and shape
- appearance
- composition
- use
- and specifically for food items, readiness to use or eat
1.5 Examples showing how the conditions are applied
The distinction between smoking different types of fish illustrates how the conditions are applied:
(a) The process of smoking salmon is zero-rated, as the new product, the smoked salmon, is a new zero-rated food item. The smoked salmon is immediately edible, making it distinct and different following the process of smoking.
(b) The process of smoking cod is standard-rated as it does not produce a new zero-rated food item, as the smoked cod is not immediately edible, and the essential characteristics have not changed following the smoking.
More examples of common food processes and their VAT liability are in the next section.
2. Examples of food processing services
2.1 Examples of zero-rated processes
Meat and fish processing:
- butchering carcasses including boning and jointing meat
- brining or curing pork into ham
- processing meat into sausages
- smoking trout and salmon
Fruit and vegetable processing:
- drying, cleaning and coating seeds or grain to make it marketable as seed for sowing, milling grain into flour, meal or semolina
- cooking, canning or otherwise preserving fruit and vegetables
- drying fruit
- roasting or grinding coffee beans
- grinding granulated sugar into caster or icing sugar
Other services:
- refining crude oil into edible oil
- processing used or contaminated oil into edible oil
- processing of liquid milk into dried milk
- kneading blocks of frozen butter, adding salt and water and packing
2.2 Examples of standard-rated processes
Meat and fish processing:
- slaughtering animals without further process
- smoking herring to make kippers
- smoking cod and haddock
- shelling shrimps, prawns or other shellfish
- skinning fish
Fruit and vegetable processing:
- cleaning and conditioning grain
- drying grain
- harvesting crops
- malting barley
- blending tea
Other services:
- sorting, grading or packaging any product
- maturing cheese or any other product (effectively a process of storage during which a natural change occurs)
- pasteurisation or sterilisation
3. Abattoirs
3.1 Slaughtering and dressing
The service of slaughtering animals without applying further processes is standard-rated. But if other processes are applied at the same time to produce new zero-rated goods, for example, dressing the carcass, then the whole supply is zero-rated.
Not all services of slaughtering and dressing produce new zero-rated goods. Section 4 gives the liability of some of the goods produced by abattoirs. If you are in any doubt you should contact the VAT helpline.
3.2 If you produce both standard and zero-rated goods
The services of slaughtering and then processing the carcass may produce new standard-rated and zero-rated goods, for example, standard-rated skins and zero-rated foodstuffs. Where the standard-rated goods are incidental to the main zero-rated supply back to the owner of the animal, the whole supply is zero-rated.
But if the new standard-rated goods are the main element of the supply to the owner of the animal, and the zero-rated goods are incidental, then the whole supply is standard-rated.
3.3 Ancillary services supplied by abattoirs
Supplies of separate ancillary services are normally standard-rated, for example:
- cold storage
- pennage
- carriage
- porterage
If you allocate specific stalls or pens for the exclusive use of your customer, your supply is exempt from VAT. You can opt to tax these exempt supplies (see Notice 742 Land and property).
4. Liability of goods produced in abattoirs
4.1 Standard-rated goods
Goods produced in abattoirs are standard-rated if they are:
- held out for sale for a non food purpose
- used for a non food purpose, including skins, horns and manure
- held out for sale without further process as canned, packaged or prepared pet food (also see Notice 701/15 Animals and animal food)
- used in the preparation of pharmaceuticals
4.2 Zero-rated goods
Goods produced in abattoirs are zero-rated if they’re:
- fit for human consumption
- animal materials, used in the manufacture of food for animals or pets, and the Animal By-Products (Enforcement) (England) Regulations 2011) and parallel legislation in devolved administrations permits the use of the materials, and the animal materials are used in premises approved by the Order
4.3 Examples of zero-rated goods
Examples of zero-rated goods from cattle, sheep, goats and pigs are:
- organs including, bladders, hearts, kidneys, livers, lungs or lites, manifolds, pancreas glands, rede, stomach, and sweetbreads (pancreas only in cattle)
- body parts including, bones, feet, paddywacks, runners (except cattle), tails, udders and weasand
- fluids and tissue including, blood, dripping, fat (provided it is not attached to specific risk material), and meat
Other zero-rated parts commonly produced from cattle include melts (from calves under 6 months), tripe and vells.
5. Agriculture and Horticulture Development Board (AHDB) Levies
The procedures set out in this section were initially agreed between Customs and the Meat and Livestock Commission (MLC). The MLC circulars for slaughterers and live exporters explain in more detail the VAT treatment of the levy charged by the Commission and they will continue to apply in relation to MLC levies. HM Revenue and Customs (HMRC) and AHDB have agreed that they will, with effect from 1 April 2008, in appropriately amended form apply similarly to AHDB levies upon the meat industry. These are reproduced in Section 6.
5.1 Background to the AHDB levies
There is a levy in two parts on:
- slaughterers and livestock exporters
- livestock producers
The levy is absorbed and paid to AHDB by the slaughterers or exporters, of which 50% is to be reclaimed statutorily from the producer.
The levy is payment for a range of benefits received from AHDB and includes VAT.
5.2 Accounting for VAT on AHDB levies
If you are the slaughterer
You will be charged the whole amount of levy by the AHDB, and then must recharge the producers 50% of the levy AHDB will provide one invoice to you confirming the amount of levy and the output and input tax due.
You can recover the VAT charged on your 50% of the general levy as input tax, subject to the normal rules.
As you act as agent for AHDB in recharging their part of the levy to the producers, you must account for the VAT as follows:
- the input tax you incurred on the rechargeable elements of the levy may be recovered in full
- you must charge, and account for in the same period, a corresponding amount of output tax to the producers
If you are the producer
You can recover the VAT charged to you by the slaughterer as input tax, subject to the normal rules.
If you are an exporter of live animals
You must follow the above procedures to account for VAT on levies you incur and recharge.
6. The Agriculture and Horticulture Development Board circulars
- Agreement has been reached between the Agriculture and Horticulture Development Board and HMRC over the VAT treatment of levies collected (invoiced) from 1 April 2008 by the Board from operators of slaughterhouses and exporters of live animals.
Prior to 1 April 2008 similar agreements existed between the Meat and Livestock Commission and HMRC.
6.1 Slaughterers
2. It is accepted that the total amount of levy invoiced (irrespective of date of slaughter) to slaughterers on or after 1 April 2008 will be subject to VAT at the standard rate, since it represents the consideration for a range of direct benefits received from the Board both by the:
- slaughterers in respect of the levy whose costs they absorb themselves (50% of the levy)
- producers in respect of the levy which is paid by slaughterers on their behalf, and fully recoverable from them (50% of the levy).
3. In the former case, the levy paid and absorbed by slaughterer is paid principal. The slaughterer will be able to treat the VAT on the levy as input tax, recoverable to the extent that it is attributable to his own taxable supplies (which should normally mean full recovery). In respect of the levy which is charged on to producers, the slaughterer will be treated as an agent rather than a principal, so that the supply of the AHDB’s services will be treated as made via the slaughterer to the producer. The producer will himself be able to recover the VAT charged to the extent that it is attributable to his own taxable supplies (and again producers who are registered for VAT will normally be able to make full recovery, since the charge will relate to taxable (mainly zero-rated) outputs).
4. In practice it has been agreed that for the ‘charged on’ levy the slaughterer should use the procedure under Section 47(3) of the VAT Act 1994, and effectively treat himself as an undisclosed agent. This means he should treat the total VAT charge made by AHDB as deductible input tax, and pass it on by charging and accounting for a corresponding amount of output tax in the same tax period to the producer with the tax invoice in his own name. This procedure is explained in Notice 700 The VAT Guide. VAT is recoverable by the producer as if the supply to him by AHDB, for which the levy is consideration, was made direct as it is, for example, in the case of fee-funded services and it will therefore be possible to avoid ‘sticking’ VAT anywhere in the chain.
5. As regards contract or ‘private’ slaughtering, nothing in the foregoing paragraphs limit slaughterers’ statutory right to full recovery of levy from persons on whose instructions slaughtering is carried out. Such levy will be subject to VAT, and that output VAT should be charged to producers (who will require to be issued with a tax invoice) and accounted for by slaughterers to HMRC.
6. To facilitate this procedure it has been agreed that AHDB will continue to issue a single tax invoice to the slaughterer. This will show:
(i) The amount of levy charged to the slaughterer in his own right as principal (that is slaughterers in respect of the levy whose costs they absorb themselves (50% of the levy) ) and that part of the levy charged to the slaughterer acting as agent (that is, producers in respect of the levy which is paid by slaughterers on their behalf, and fully recoverable from them (50% of the levy)).
(ii) The total levy and the VAT charged thereon which should be treated by the slaughterer as his input tax.
(iii) The slaughterer’s output tax under the existing self-billing arrangements on the recovery expense allowance.
6.2 Exporters
The information provided in 6.1 in relation to slaughters applies identically to exporters.
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