Running a restaurant, cafe, or takeaway in the UK is a cash-intensive, margin-sensitive business. Your food cost, labour cost, VAT liability, and tips allocation all interact in ways that a general high-street accountant rarely sees. That is why finding the right accountant for restaurants makes a direct difference to what you keep after tax.

This article covers the specific financial and tax challenges of the hospitality sector. We will look at VAT on different food categories, payroll for tipped staff, the Construction Industry Scheme for fit-outs, and the accounting triggers that tell you it is time to switch from a generalist to a specialist.

Why Hospitality Accounting Is Different

A standard accountancy practice handles dozens of sectors. They know corporation tax, self assessment, and bookkeeping. What they often miss are the sector-specific rules that apply to food and drink businesses.

Here is what makes hospitality different:

  • VAT on food is not straightforward. Cold takeaway food is zero-rated. Hot takeaway food is standard-rated. Eat-in food is standard-rated. One menu can have three VAT treatments.
  • Tips and service charges have different tax and NI treatments depending on how they are paid. Cash tips left on the table are outside PAYE. Card tips paid through the till are inside PAYE. Discretionary service charges added to the bill are the business's income, not the staff's, unless you allocate them.
  • Stock and waste directly affect gross profit. A general accountant may not ask about wastage percentages. A specialist will.
  • Payroll complexity is higher than most sectors. Split shifts, zero-hours contracts, tronc schemes, and seasonal staff all need careful handling.
  • Construction Industry Scheme (CIS) applies to kitchen fit-outs, extraction system installations, and building work. If you pay a builder to refit your kitchen, you may need to deduct CIS from their invoice. Get it wrong and HMRC can charge you the under-deducted amount plus penalties.

A specialist accountant for restaurants knows these rules because they see them every day. A generalist may only encounter them once a year.

VAT on Food and Drink: The Rules That Trip Restaurants Up

VAT is the single biggest tax risk for restaurants and cafes. The rules are detailed and the penalties for getting them wrong are harsh.

Zero-Rated vs Standard-Rated Food

Most food sold in a supermarket is zero-rated. That same food, sold in a restaurant or cafe, is usually standard-rated at 20%. But there are exceptions.

Cold takeaway food is zero-rated. A sandwich, a salad box, a cold pastry. If the customer takes it away and it is not heated, no VAT. But if you heat that same pasty in a microwave, it becomes standard-rated. HMRC has published guidance on this, and tribunals have heard cases about exactly where the line sits.

Hot takeaway food is standard-rated. This includes rotisserie chickens, hot pies, chips, and anything kept above ambient temperature for sale. If you have a hot counter, you charge 20% VAT.

Eat-in food is standard-rated regardless of temperature. If the customer sits at a table, uses cutlery, or has service, the supply is standard-rated. This includes a cold sandwich eaten on your premises.

Drinks are almost always standard-rated. Tea, coffee, soft drinks, bottled water, alcohol. The only exception is milk, which is zero-rated when sold as a staple food item.

Flat Rate VAT for Restaurants

The Flat Rate Scheme allows businesses to charge 20% VAT but pay HMRC a lower fixed percentage based on their sector. For restaurants and takeaways, the flat rate is 12% (for food businesses) or 13% for catering services. Limited cost traders (those who spend less than 2% of turnover on relevant goods, or less than £1,000 per year) must use 16.5%.

The flat rate can simplify VAT accounting, but it is rarely the best option for restaurants. Your input VAT on food, drink, equipment, and utilities is usually significant. Under the flat rate, you cannot reclaim input VAT except on capital assets over £2,000. Most restaurants are better off on standard VAT accounting.

Your accountant for restaurants should run the numbers both ways before you join or leave the scheme.

Tips, Tronc, and Service Charges

How you handle tips and service charges affects your staff's take-home pay, your NI bill, and your corporation tax liability.

Cash Tips

Cash tips given directly to staff by customers are outside PAYE. The staff member is responsible for reporting them on their self assessment tax return. The employer has no reporting obligation.

Card Tips

Tips paid by card through the till are the employer's money until they are allocated to staff. HMRC treats these as earnings. You must operate PAYE and NI on them. The same applies to tips added to a bill via a card machine.

Tronc Schemes

A tronc scheme is a formal arrangement where tips and service charges are pooled and distributed to staff. The tronc can be operated by the employer or by a tronc master (usually a senior staff member, not a director). If the tronc master operates the scheme, the employer does not pay employer NI on the tips distributed. This is a significant saving.

The rules are detailed. The tronc must be genuinely independent of the employer. The distribution must be fair and transparent. A specialist accountant can help you set up a compliant tronc scheme and avoid HMRC challenges.

Payroll for Restaurants and Cafes

Hospitality payroll has more moving parts than most sectors. You may have:

  • Zero-hours staff whose hours vary week to week
  • Split shifts that cross midnight
  • Seasonal workers on temporary contracts
  • Chefs and kitchen porters on different pay rates
  • Staff who receive tips and service charges through the payroll
  • Apprentices on lower minimum wage rates

Each of these needs correct RTI (Real Time Information) reporting. HMRC's National Minimum Wage compliance team actively targets hospitality businesses. Errors on minimum wage can lead to back-pay bills, penalties, and public naming.

Your payroll software should handle variable hours and tips allocation. Xero and FreeAgent both handle tips through payroll, but the setup needs to be correct from day one. Sage 50 is still common in larger restaurant groups.

Stock, Wastage, and Gross Profit

A general accountant may not ask about your food cost percentage. A specialist will.

Gross profit in hospitality is driven by three numbers: menu pricing, portion control, and wastage. If your accountant does not review your gross profit margin monthly, you are missing the biggest lever in your business.

Your accountant should help you set up a stocktaking process, calculate your cost of goods sold accurately, and flag variances. If your food cost percentage moves from 32% to 38% in a month, that is a problem. A specialist will spot it and ask why.

CIS for Kitchen Fit-Outs and Refurbishments

If you pay a builder to fit out your kitchen, install extraction, or build a dining area, the Construction Industry Scheme may apply. You must register as a CIS contractor, verify the builder's status with HMRC, and deduct 20% from their labour payments (or 30% if they are not registered).

If you do not deduct CIS when you should, HMRC can charge you the amount you should have deducted plus interest and penalties. This is a common trap for new restaurant owners who pay a builder directly without checking CIS rules.

Your accountant should flag this before you sign the contract, not after you have paid the invoice.

Corporation Tax and Profit Extraction

Most restaurants and cafes operate as limited companies. Corporation tax at 19% to 25% applies to profits. How you extract those profits affects your personal tax bill.

The typical structure for a hospitality business is a director salary at the personal allowance level (£12,570 for 2025/26) plus dividends. Dividends are taxed at 8.75% basic rate, 33.75% higher rate, and 39.35% additional rate. The annual dividend allowance is £500.

If you have a partner or spouse working in the business, paying them a salary can be tax-efficient. Alphabet shares allow flexible dividend allocation. But be careful with settlement legislation if you gift shares to someone who does not work in the business.

Your accountant for restaurants should model different extraction strategies based on your projected profits and personal circumstances.

Making Tax Digital for Income Tax (MTD for ITSA)

From April 2026, self-employed restaurant owners and landlords with qualifying income over £50,000 must use MTD-compatible software to keep digital records and submit quarterly updates to HMRC. From April 2027, the threshold drops to £30,000. From April 2028, it drops to £20,000.

If you run your restaurant as a sole trader, you will need MTD-compatible software. Xero, QuickBooks, and FreeAgent all support MTD. Sage Accounting and GoSimpleTax also work. If you use spreadsheets, you will need bridging software to submit the quarterly returns.

Limited companies are not yet in scope for MTD for ITSA, but MTD for Corporation Tax is expected from 2026. The direction of travel is clear: digital record-keeping is becoming mandatory for all businesses.

When to Switch to a Specialist Accountant

If your current accountant cannot answer these questions without looking them up, it is time to switch:

  • What is the VAT treatment of a cold takeaway sandwich vs a hot takeaway pasty?
  • How should card tips be processed through payroll?
  • Does a tronc scheme save employer NI?
  • What CIS rate applies to a kitchen fit-out?
  • What is your food cost percentage and how does it compare to sector benchmarks?

A specialist accountant for restaurants knows these answers. They also know the sector's typical margins, the common HMRC enquiry triggers, and the software that works best for hospitality businesses.

At Holloway Davies, we are ICAEW qualified accountants who work with hospitality businesses across the UK. From a single-site cafe in Bristol's Harbourside to a multi-site restaurant group in Manchester's Northern Quarter, we understand the numbers that matter in your sector.

If you want an accountant who knows the difference between a tronc and a tip, and who will challenge your food cost percentage, get in touch.

Frequently Asked Questions

Do I need a specialist accountant for my restaurant?

If your turnover is above the VAT threshold (£90,000), you have tipped staff, or you are planning a fit-out or refurbishment, a specialist accountant will save you more in tax and compliance costs than they charge in fees. A generalist may miss VAT nuances, CIS deductions, or tronc opportunities.

Can I use the Flat Rate VAT Scheme for my restaurant?

You can, but it is rarely the best option. Restaurants typically have significant input VAT on food, drink, utilities, and equipment. Under the flat rate, you cannot reclaim input VAT (except on capital assets over £2,000). Standard VAT accounting usually gives a better result. Your accountant should run the numbers both ways.

How should I handle tips for my staff?

Cash tips given directly to staff are outside PAYE. Card tips paid through the till are earnings and must go through payroll. A tronc scheme operated by an independent tronc master can save employer NI on tips distributed. The rules are detailed, so take advice before setting up a tronc.

What is the Construction Industry Scheme and does it apply to my cafe fit-out?

CIS applies to most construction work, including kitchen fit-outs, extraction installation, and building work. If you pay a builder for labour, you may need to deduct 20% (or 30% if unregistered) and pay it to HMRC. Failure to do so can result in HMRC charging you the under-deducted amount plus penalties. Your accountant should flag this before you sign any contract.