Running a restaurant or hospitality business in the UK involves accounting challenges that most other sectors never encounter. Between the VAT complexities on food and drink, the cash-heavy nature of the business, staff tips, perishable stock and slim margins, getting your numbers right is not just good practice – it is survival.
VAT on food and drink
This is where hospitality accounting gets complicated. The VAT treatment of food and drink depends on what it is, where it is consumed and how it is served.
The basic rules
| Supply | VAT rate |
|---|---|
| Hot food and drink consumed on premises | 20% (standard) |
| Hot takeaway food and drink | 20% (standard) |
| Cold takeaway food (not eaten on premises) | 0% (zero-rated) |
| Cold drinks (takeaway) | 20% (standard) |
| Alcoholic drinks (any setting) | 20% (standard) |
| Catering services | 20% (standard) |
The distinction between hot and cold, eat-in and takeaway, creates endless edge cases. A cold sandwich eaten in your restaurant is standard-rated. The same sandwich in a bag taken away is zero-rated. A heated pasty is standard-rated regardless.
Common pitfalls
- Mixed supplies – a meal deal combining standard-rated and zero-rated items must be apportioned
- Service charges – subject to VAT at the same rate as the food they relate to
- Staff meals – if provided free, output VAT may be due on the cost to the business
- Takeaway vs eat-in – you need a system to distinguish between these at the point of sale for correct VAT treatment
If your turnover exceeds £90,000, you must register for VAT. Given the complexity, investing in a point-of-sale system that handles VAT coding automatically is well worth it.
Tips and service charges
How you handle tips has accounting, tax and legal implications.
Types of tip
| Type | VAT treatment | Tax treatment |
|---|---|---|
| Cash tip left by customer (no employer involvement) | No VAT | Employee self-reports on Self Assessment |
| Service charge added to bill (compulsory) | VAT applies (part of the supply) | Employer deducts PAYE and NIC via payroll |
| Service charge added to bill (discretionary) | No VAT (if customer can refuse) | Depends on whether employer controls distribution |
| Card tip (employer distributes) | No VAT | Employer deducts PAYE and NIC via payroll |
| Tronc system (independent tronc master) | No VAT | Tronc master operates PAYE; no employer NIC |
The Employment (Allocation of Tips) Act 2023 requires employers to distribute tips fairly among workers and to have a written tipping policy. If you use a tronc (a system where tips are pooled and distributed by an independent person), employer NIC is not due on the payments, making it the most tax-efficient approach for staff.
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Stock control
Food businesses deal with perishable stock, which requires tighter controls than most industries.
Tracking stock costs
To understand your profitability, you need to know your cost of goods sold (COGS) accurately. This means tracking:
- Opening stock at the start of the period
- Purchases during the period (food, drink, consumables)
- Closing stock at the end of the period
- Wastage (spoilage, over-portioning, theft)
COGS = Opening stock + Purchases - Closing stock
Target margins
| Category | Typical cost percentage | Target gross margin |
|---|---|---|
| Food | 28-35% of selling price | 65-72% |
| Wet (alcohol) | 20-30% of selling price | 70-80% |
| Non-alcoholic drinks | 15-25% of selling price | 75-85% |
If your food cost percentage creeps above 35%, you need to investigate. Common causes include poor portion control, theft, supplier price increases that have not been reflected in your menu prices, and excessive waste.
Stocktaking
Regular stocktaking is essential:
- Weekly for high-value items (spirits, wine, premium ingredients)
- Monthly for full stock counts
- Compare actual stock to theoretical stock (what you should have based on purchases and sales)
Significant discrepancies indicate waste, theft or recording errors.
Cash handling
Many hospitality businesses still handle significant amounts of cash, which creates both accounting and security challenges.
- Cash up daily – count the till at the end of each shift and compare to the POS report
- Bank cash regularly – do not leave large amounts on premises
- Record all cash transactions – including petty cash payments
- Separate floats – each till should have its own float, counted at the start and end of each shift
- Investigate discrepancies immediately – a consistent pattern of shortages needs attention
HMRC is particularly alert to cash-heavy businesses. If your records do not add up, they may launch an investigation. Point-of-sale systems that record every transaction electronically provide a robust audit trail.
Payroll complexities
Hospitality businesses face specific payroll challenges:
- Variable hours – many staff are on zero-hours or variable contracts
- National Minimum Wage – different rates for different age groups; accommodation offset if you provide housing
- Holiday pay – calculating holiday entitlement for irregular hours workers
- Split shifts and overtime calculations
- Auto-enrolment pensions – even for part-time staff who meet the earnings threshold
Each April the government sets new National Minimum Wage and National Living Wage rates for each age band and for apprentices, based on Low Pay Commission recommendations. Check the current hourly rates on GOV.UK before each April pay run, and budget for the increase in your prices.
Key financial reports
Run these reports regularly to stay on top of your business:
- Daily sales report – broken down by food, drink, takeaway, delivery
- Weekly labour cost percentage – target 25-35% of revenue
- Weekly food cost percentage – target 28-35% of revenue
- Monthly profit and loss – are you actually making money?
- Cash flow forecast – hospitality businesses fail from cash flow problems more than any other cause
Licensing and compliance costs
Budget for these ongoing costs in your accounts:
- Premises licence – annual fee based on rateable value
- Personal licence – £37 for the licence holder
- Music licence (PRS for Music and PPL) – if you play music
- Food hygiene rating – inspections are free but remediation costs money
- Business rates – check whether you qualify for small business rates relief
- Insurance – employers’ liability, public liability, product liability, business interruption
Common accounting mistakes in hospitality
- Getting VAT wrong on food – the rules are genuinely confusing; invest in proper POS setup and accounting software
- Not tracking wastage – unmeasured waste destroys margins silently
- Ignoring cash discrepancies – small daily shortages add up to large annual losses
- Under-claiming expenses – cleaning supplies, uniforms, menu printing, equipment repairs are all deductible
- Not forecasting cash flow – seasonal businesses need to plan for quiet months
- Failing to adjust menu prices – when ingredient costs rise, margins fall unless you reprice
Seasonal considerations
Hospitality businesses often have significant seasonal variation. Your accounting should reflect this:
- Budget monthly, not annually – a flat monthly target ignores the reality of busy and quiet periods
- Build cash reserves during peak months to cover quiet periods
- Manage stock levels – reduce orders during quiet periods to minimise waste
- Flex your staffing – use the forecasts from your accounting records to plan rotas
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