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Food delivery? VAT compliance should be on the menu
Getting food at your doorstep using technology could have never been imagined until the tech giants like Uber, Zomato and more recently Talabat and Careem have made it possible. Simply using fingers on customer friendly apps, one can now conveniently anytime during the day order food that will be delivered to your office or home.
Online food delivery apps typically work on the aggregator model where various restaurants are aggregated on the digital platform that allows customers to choose the restaurant and place the order. The order is passed to the restaurant that cooks the food and the app staff gets it delivered at the customer’s doorstep.
The food delivery apps earn income from various sources – delivery fee charged from customers, a commission from restaurants, premium listing fee from restaurants to list them on the app and third-party ad revenue through Google ads. Each source of revenue needs a close look to ensure its appropriate taxability.
The areas of attention for apps are more on identifying who’s the supplier of food & delivery and whether they are two separate supplies or one composite supply. Typically, the apps only act as pure delivery service providers obliged to account for VAT on the delivery fee. The VAT treatment may differ where food is simply picked up from the restaurant and delivered to the customer vis-à-vis where the app buys and store food packets to ensure faster delivery to the hungry customers during peak hours.
In the first situation, delivery fee from customers and commission from restaurants are taxable supplies. In the second situation, the app will have to account for VAT on the supply of food and its delivery to customers but simultaneously also be eligible to reclaim the VAT paid to the restaurant on the purchase of the food packets.
The VAT may still apply under the deemed supply provisions where the food bought by the app could not be sold but consumed internally by its staff. If VAT paid to the restaurant was recovered, there would be an obligation to account for VAT on the value of food unsold.
To entice customers hook on to the app, various promotional schemes are launched. A customer may be given a Dh50 voucher redeemable against the order to reduce his cash payout. The app will pass on the discount from its own income. Correct accounting for discounts, VAT and its appropriate reflection on the invoice is important. The VAT position will be different where the customer is given a voucher not sponsored by the app, rather by a third party. It is important to structure the transactions properly to avoid any VAT dispute later.
Separately, the customers may also be given freebies when the order value exceeds a threshold. This can be a free dessert etc. The app would typically ask the restaurant to pack the freebie along with the order and later pay the restaurant for the value of the freebie. Similarly, some apps also make the orders free of cost should the food is not delivered within a specified time. Whether supply of a freebie or making the food free qualify as a deemed supply and subject to VAT should be analysed.
The apps also earn revenue from placing adverts. The UAE VAT law considers online advertisements as a supply of electronic services subject to VAT based on their use and enjoyment in the UAE. It is critical to analyze the contract with the clients, their location and the location of the target audience. The app’s client may be located outside the UAE, but the adverts are targeted for the UAE audience to increase revenue for the client’s UAE based restaurants. Will this be considered a zero-rated supply (since the client does not have a presence in the UAE) or should it be subject to the standard rate of VAT since the use and enjoyment of the advert happens in the UAE. It is important the app is able to demonstrate legally the actual place of use and enjoyment of the adverts for appropriate VAT treatment.
Issuance and delivery of the tax invoice is mandatory in the VAT law. The app should issue a tax invoice to the customers and ensure it is delivered. It has been observed generally, the app emails a payment summary to the customer that captures the value of food plus the delivery fee and VAT on it. The food invoice is issued by the restaurant and delivered by the app staff to the customer. The app should also issue and deliver a separate simplified tax invoice to the customer for the delivery fee. Non-delivery of this invoice will be considered a non-compliance of the VAT law. Where the delivery fee is fixed, the amount of VAT on it should be considered inclusive. The VAT amount, however, needs to be shown clearly on the invoice.
The online delivery concepts are fairly new and the tax authorities across the globe are increasingly finding it challenging to tax them. Because of different business models prevalent, identifying and putting a tax treatment on every transaction becomes a task. It is critical for businesses to be vigilant on how the contracts are structured and ensure no transaction goes unnoticed by their tax team.