- Standard-rated at 5%: Most food and beverages sold by restaurants, whether consumed on-premises, takeaway, or delivery, are subject to VAT at the standard 5% rate.
2. VAT on Services
- Dining services: VAT applies to all dining services, including the service charge, regardless of whether the food is eaten in-house or taken away.
- Delivery services: If a restaurant offers delivery services, VAT applies to the total invoice amount, which includes both the price of the food and the delivery charges.
3. Input VAT on Business Expenses
- Restaurants are allowed to claim input VAT on purchases and expenses made for the business, such as:
- Ingredients and raw materials for food preparation.
- Equipment and furniture (e.g., kitchen appliances, tables, chairs).
- Utilities (electricity, water, etc.)
However, input VAT on employee-related expenses, such as entertainment, is generally not recoverable.
4. Special Considerations
- Promotions and discounts: When restaurants offer discounts, the VAT must be calculated on the discounted price. VAT-inclusive pricing should be clearly stated.
- Service charges and tips: If a restaurant includes a mandatory service charge, VAT must be charged on that amount as well. Voluntary tips from customers, however, are not subject to VAT.
5. Record Keeping and Compliance
- Restaurants: must maintain proper records for input and output VAT for at least 5 years.
Tax invoices: must be issued to customers showing the VAT amount separately.
Adhering to these VAT regulations is essential for restaurants to remain compliant and avoid fines or penalties.
6. Free Meals (Promotional Offers or Discounts)
When a restaurant provides a free meal to a customer as part of a promotion (e.g., "Buy One Get One Free" or a complimentary dessert), VAT treatment varies based on the following:
Discounted/Promotional Offers:
If the meal is part of a promotion (e.g., 50% off on a second item), VAT is charged on the discounted price of the entire transaction. The invoice must reflect the discounted amount and the VAT should be calculated accordingly.
Completely Free Meal:
If a meal is given completely free without any purchase requirement (e.g., as a loyalty reward or goodwill gesture), no VAT is applicable on the free meal. However, the restaurant cannot claim input VAT on the expenses related to providing that free meal, as it is not considered a taxable supply.
Free Meal as Part of a Larger Transaction:
If the free meal is tied to a larger purchase (e.g., "Spend AED 100 and get a free dessert"), VAT is calculated on the full price of the paid items, but no VAT is charged for the free item.
7. Vouchers
The VAT treatment of vouchers depends on the type of voucher and how it is redeemed.
Monetary Vouchers:
If a restaurant offers a voucher that represents a specific monetary value (e.g., AED 100 voucher), VAT is not applied at the time the voucher is issued or sold.
VAT is applied only when the voucher is redeemed for a purchase, based on the value of the goods or services provided at that time. The customer uses the voucher as part or full payment, and VAT is calculated on the total price of the meal.
For example, if the customer uses a voucher worth AED 100 and orders food worth AED 150, VAT is applied on AED 150 (the total value of the supply), even if part of the payment is covered by the voucher.
Discount Vouchers (Non-monetary vouchers):
If a voucher provides a discount on the total bill (e.g., "20% off your next meal"), VAT is calculated on the discounted amount.
The invoice should reflect the discounted total, and the VAT should be applied to that reduced amount.
The input VAT for the goods and services provided by the restaurant in relation to this discounted transaction can still be claimed.
8. Gift Vouchers for Free Meals
If a restaurant provides a gift voucher that entitles the customer to a specific free meal (e.g., "Free main course"), no VAT is applied when the voucher is issued or redeemed. Since the customer does not pay for the meal, it is considered a non-taxable supply.
However, the restaurant cannot claim input VAT on the cost of preparing and serving the free meal, since the meal is not tied to a taxable transaction.
Key Points for VAT Compliance
Issuing invoices:
In cases where free meals or vouchers are part of a transaction, the restaurant must issue VAT invoices reflecting any discounts or promotions.
Record-keeping:
Restaurants cannot claim input VAT on costs related to providing free meals unless they are part of a larger taxable supply.
Input VAT on free meals:
Accurate records of all promotions, vouchers, and free items must be maintained to ensure the correct VAT treatment is applied.
Conclusion
By following these guidelines, restaurants can ensure compliance with UAE VAT law when offering free meals or vouchers to customers.
