An independent restaurant turning over several hundred thousand pounds a year runs on thin margins, a large payroll and a lot of VAT. Get the VAT treatment of food and service charges wrong, mishandle tips or let payroll drift, and the cost comes straight out of profit. This guide covers the areas where restaurant owners most often lose money, and what good restaurant accounting looks like once you have staff, a busy till and a growing business.
- VAT on food and drink
- Service charges and VAT
- Tips, tronc and the law on allocating tips
- Payroll, minimum wage and employer costs
- Food cost, labour cost and weekly figures
- Business rates from April 2026
- Sole trader or limited company
- What a restaurant accountant should do for you
- Frequently asked questions
VAT on food and drink
Most restaurants pass the VAT registration threshold of £90,000 of taxable turnover in a rolling 12 months early on, so VAT is part of the business from the start. The rules on food are where mistakes happen.
Food and drink eaten on your premises is standard rated at 20%. Alcohol and soft drinks are standard rated wherever they are consumed. Hot takeaway food is standard rated. Most cold takeaway food is zero rated, although confectionery, crisps and similar items stay standard rated. If you sell a mix of eat in, hot takeaway and cold takeaway, your till needs to record each sale under the right VAT code. A till set up with one rate for everything either overpays VAT or underpays it, and HMRC can go back four years when it finds an underpayment.
Delivery through apps adds another layer. The platform commission is a cost to you, and the VAT on that commission is reclaimable if you hold a valid VAT invoice. The sale itself is still yours, so the VAT on the food is still yours to account for.
The Flat Rate Scheme rarely suits a restaurant. The flat rate percentage for catering is high and you lose the right to reclaim VAT on most purchases, so standard VAT accounting almost always works out better once food, drink and equipment costs are high.
Service charges and VAT
A discretionary service charge, where the customer can choose not to pay it, is outside the scope of VAT. A compulsory service charge, for example one added automatically to every bill for large tables with no option to remove it, is part of the price of the meal and is subject to VAT at 20%. The wording on your menus and bills decides which treatment applies, so check it before you assume the charge is VAT free.
Tips, tronc and the law on allocating tips
Since 1 October 2024 the Employment (Allocation of Tips) Act 2023 has required employers to pass all qualifying tips, gratuities and service charges to workers in full, without deductions other than tax. Where tips are paid by card or through the business, you need a written tipping policy available to staff, you must allocate tips fairly and pay them by the end of the month after the month in which they were received, and you must keep records of tips received and paid out for three years. Workers can ask to see those records.
The tax treatment depends on how tips are handled:
- Tips paid by card and shared out by you through payroll are subject to PAYE and to employer and employee National Insurance.
- Tips shared out through a tronc run by an independent troncmaster are still subject to PAYE, but no National Insurance is due, provided the employer has no say in who gets what.
- Cash tips handed directly to staff, with no involvement from you, are taxable for the worker but fall outside your payroll.
A properly run tronc saves National Insurance for the business and the team. It has to be set up correctly, with a genuine troncmaster, a separate tronc PAYE scheme and clear rules, or HMRC will treat the payments as employer distributed. Your accountant should check the arrangement each year, especially when managers change.
Payroll, minimum wage and employer costs
Staff costs are usually the largest cost in a restaurant after food. From April 2026 the National Living Wage for workers aged 21 and over is £12.71 an hour, the rate for 18 to 20 year olds is £10.85 and the rate for under 18s and apprentices is £8.00. Rates change every April, so build the increase into your pricing and rotas early.
Employer National Insurance is 15% on earnings above £5,000 a year per employee. The Employment Allowance of £10,500 reduces the employer National Insurance bill for most businesses, but not for a company where the director is the only employee paid above the threshold.
Minimum wage breaches in hospitality often come from uniform costs deducted from pay, unpaid time for training or closing down, and tips used to top up pay to the legal minimum. Tips cannot count towards the minimum wage. Outsourced payroll with a provider who understands hospitality catches these issues before HMRC does.
You also need to auto enrol eligible staff into a workplace pension and keep up with re-enrolment duties, which catch out businesses with high staff turnover.
Food cost, labour cost and weekly figures
Annual accounts tell you how the restaurant did last year. To run it well you need figures every week or every month. The three numbers most owners watch are:
- Food and drink cost as a percentage of sales, by category.
- Labour cost as a percentage of sales, including employer National Insurance and pension.
- Prime cost, which is food, drink and labour added together.
Targets vary by concept, but tracking the trend matters more than any single benchmark. A two point rise in food cost on £750,000 of sales is £15,000 of lost profit. Management accounts built from your till, supplier invoices and payroll show you where margin is slipping while there is still time to act, for example by repricing a dish, renegotiating with a supplier or changing a rota.
Good bookkeeping makes this possible. Connecting your till system and bank feeds to cloud accounting software, and posting supplier invoices weekly, gives you figures you can trust. Our bookkeeping service keeps this up to date so the numbers are ready when you need them.
Business rates from April 2026
Retail, hospitality and leisure relief ended on 31 March 2026. In its place, properties in those sectors in England with a rateable value below £500,000 now pay lower multipliers than other businesses. The lower small business multiplier for these properties is 38.2p and the lower standard multiplier is 43.0p for 2026/27. Your bill also reflects the 2026 revaluation, so check the new rateable value on your premises and challenge it if it looks wrong. Business rates are set differently in Scotland, Wales and Northern Ireland.
Sole trader or limited company
Many restaurants start as a sole trader or partnership and move to a limited company as profits grow. A company pays corporation tax at 19% on profits up to £50,000 and 25% on profits above £250,000, with marginal relief in between. Directors then take a mix of salary and dividends. A company also limits your personal liability for leases, supplier debts and claims, which matters in a business with premises and staff.
Moving an existing restaurant into a company involves transferring the business, equipment and goodwill, as well as the lease, contracts, payroll and VAT registration. It needs planning, ideally at a natural break such as a year end. Our corporation tax team can model the figures before you decide.
What a restaurant accountant should do for you
A general accountant files your returns. A restaurant accountant should also:
- Check your till VAT codes and how you treat service charges.
- Review your tipping policy and tronc so you stay compliant and save National Insurance where you can.
- Run payroll accurately every week or month, including holiday pay for variable hours staff.
- Give you monthly figures on food cost, labour cost and cash.
- Plan your VAT and corporation tax payments so they never catch you short.
If you are not getting this from your current accountant, you can switch accountants at any point in the year.
Need an accountant for your restaurant?
NDCA is an ACCA-regulated accountancy practice with fixed monthly fees and a named accountant. Book a free consultation and pick a time that suits you.
Frequently asked questions
Is restaurant food subject to VAT in the UK?
Yes. Eat-in meals, plus hot takeaway food, carry the 20% rate. Most cold takeaway food is zero rated. Alcohol and soft drinks are standard rated wherever they are consumed.
Do I charge VAT on a service charge?
Only if the service charge is compulsory. An optional charge the customer can refuse carries no VAT. A compulsory charge forms part of the price and is subject to VAT at 20%.
Do restaurants have to pass all tips to staff?
Yes, in full. The law also requires a fair split, a written tipping policy and three years of records.
Is National Insurance due on tips paid through a tronc?
No, provided an independent troncmaster decides the split and you play no part in it. PAYE income tax still applies.
Can tips count towards the minimum wage?
No. Tips, gratuities and service charges cannot be used to make up the National Minimum Wage or National Living Wage.
Should my restaurant be a limited company?
Often yes once profits are steady, because a company can reduce the overall tax on profits and limits your personal liability. The right answer depends on your profits, how much you need to draw and your plans for growth, so it is worth modelling before you change.
