Restaurant accounting: The ultimate UK guide

Picture the end of a busy Saturday service. The floor is quiet, the till is cashed up and supplier invoices wait by the pass. Restaurant accounting is the part of the job that rarely gets applause, yet it decides whether a busy week becomes a profitable one.

UK hospitality also carries rules most sectors never meet. You charge more than one VAT rate across a single menu.

New tipping law governs how gratuities reach your staff, and Making Tax Digital now sets how you keep records. All of this sits on margins that leave little room for error.

This guide covers what restaurant accounting involves and how VAT applies to food and drink. It walks through the new tips rules, payroll and the reports and KPIs worth tracking. It also explains when to bring in software or an accountant.

The essentials

• UK restaurants charge VAT at two rates on food. Hot food and anything eaten in are standard-rated at 20%, while cold takeaway food is zero-rated.
• You must pass on 100% of tips to staff. The Employment (Allocation of Tips) Act 2023 also requires a written tips policy.
• Making Tax Digital for Income Tax has applied since April 2026. It reached sole traders and landlords earning over £50,000 first, with lower thresholds to follow.
• A healthy prime cost sits between 55% and 60% of revenue. Food cost usually runs at 28–35%, and COGS takes roughly one-third of gross revenue.
• Integrating your ePOS with your accounts is the backbone of restaurant accounting. Sales, VAT and COGS flow from the till into Xero, QuickBooks or Sage.

On this page

• What is restaurant accounting?
• How is restaurant accounting different in the UK?
• How does VAT work on food and drink?
• How should you handle tips and service charges?
• What is Making Tax Digital and when does it apply?
• Payroll and PAYE for restaurants
• Which accounting method should you use: cash or accrual?
• Which reports and KPIs should you track?
• Software, an accountant or both?
• Your next step with restaurant accounting
• Frequently asked questions

What is restaurant accounting?

Restaurant accounting is the set of processes used to record, manage and report the money that moves through a venue. It covers revenue, expenses, payroll, VAT and the operating costs behind every cover you serve.

Done well, it keeps you compliant with HMRC and lets you make decisions from real numbers rather than a gut feeling.

Bookkeeping vs accounting

Bookkeeping and accounting are often used interchangeably, but they do different jobs. Bookkeeping is the recording and organising of financial transactions such as sales, purchases and receipts. Accounting analyses and interprets that data to guide decisions.

Your bookkeeper keeps the records accurate. Your accountant then uses those records to prepare tax returns and advise on compliance.

How is restaurant accounting different in the UK?

Restaurant accounting is harder than accounting for most other businesses because hospitality combines thin margins with heavy compliance. A few features make it distinct.

Stock is perishable, so waste, spoilage and portion control feed straight into your food cost. Cash still moves through many venues, which raises the bar on accurate takings and HMRC record-keeping.

Margins are slim. A full-service restaurant often works on single-digit net profit, so a few percentage points of food or labour cost decide the year.

On top of that, you apply more than one VAT rate across a single menu. You also run payroll on variable hours that often include tips. Few sectors combine all of these.

How does VAT work on food and drink?

VAT on food and drink depends on what you sell and how it is eaten. Hot food and anything consumed on the premises are standard-rated at 20%. Cold takeaway food is generally zero-rated, while alcohol is always standard-rated at 20%.

You must register for VAT once your taxable turnover passes £90,000 in any rolling 12-month period. Below that, registration is voluntary.

The eat-in and takeaway split matters at the till. A cold sandwich sold to take away is usually zero-rated, but eat in and it becomes standard-rated. A hot pie carries 20% either way.

HMRC sets the detail in VAT Notice 709/1, which covers catering, takeaway food and the temperature and premises tests.

Key point: Hot and eat-in food is standard-rated at 20%, cold takeaway food is zero-rated and alcohol is always 20%. Register for VAT once taxable turnover passes £90,000 in a rolling 12 months.

How should you handle tips and service charges?

Since 1 October 2024, you must pass on 100% of tips and service charges to staff without deductions. This is set by the Employment (Allocation of Tips) Act 2023.

You need a written tips policy and must keep tipping records for at least three years. Staff can ask to see their records, so accuracy matters.

Many venues run a tronc, an arrangement that shares tips among staff independently of the employer. A properly run tronc can keep tips outside employer National Insurance contributions, though income tax still applies. HMRC’s E24 guide on tips, gratuities and troncs sets out when National Insurance is due.

HMRC sets out the rules on tips at work, including how troncs and service charges are treated for tax.

What is Making Tax Digital and when does it apply?

Making Tax Digital (MTD) is HMRC’s programme requiring businesses to keep digital records and file updates with compatible software. It already applies to VAT.

MTD for VAT applies to all VAT-registered businesses, which covers most restaurants above the £90,000 threshold. You keep digital records and submit VAT returns through compatible software.

MTD for Income Tax then phases in for sole traders and landlords by qualifying income. It applies to income over £50,000 from April 2026, then £30,000 from April 2027 and £20,000 from April 2028. Affected businesses send quarterly digital updates rather than a single year-end return.

HMRC explains the current thresholds and dates in its Making Tax Digital for Income Tax guidance.

Payroll and PAYE for restaurants

Payroll in a restaurant means running PAYE, reporting in real time and handling variable hours, pensions and tips together. It is one of the more involved parts of restaurant accounting.

You operate PAYE to deduct income tax and National Insurance from wages, then report to HMRC each pay run through Real Time Information (RTI).

Pension auto-enrolment applies to eligible staff, and holiday pay on variable hours must reflect average earnings. Tips paid through a tronc sit alongside payroll but follow their own tax treatment.

Which accounting method should you use: cash or accrual?

Restaurants generally choose between two accounting methods: cash basis and accrual basis. The right one depends on your size and how you want to see your finances.

The cash method records revenue and expenses only when money actually changes hands. It is simple and mirrors your cash flow, which suits smaller venues with straightforward finances. It can understate what you owe, because it ignores unpaid invoices.

The accrual method records revenue and expenses when they are earned or incurred, even before cash moves. It is more work, but it gives a truer picture of financial health by counting money owed and owing.

If you are unsure, ask an accountant which method fits your structure and goals.

Which reports and KPIs should you track?

Four reports give you a clear view of your finances: the profit and loss statement, the balance sheet and the cash flow statement. A chart of accounts feeds them all.

Your restaurant chart of accounts is the source of truth. It organises every expense, revenue line and asset, and it feeds your other statements.

A profit and loss statement (P&L) tracks revenue, cost of goods sold and expenses over a period to show profit or loss. Review it monthly so you spot trends early.

A balance sheet lists your assets and liabilities at a point in time. A cash flow statement tracks money in and out, which helps you plan for quieter months. Your ePOS also produces end-of-day sales and controllable-cost reports for daily performance.

Alongside the reports, track a short set of KPIs. Our guide to restaurant profit margins puts a healthy food cost at 28–35% of revenue and prime cost at 55–60%:

• cost of goods sold: around one-third of gross revenue goes on cost of goods sold (COGS).
• prime cost: your COGS plus labour, ideally 55–60% of revenue.
• food cost: usually 28–35% of revenue; use our free food cost calculator to check yours.
• labour cost: track your labour cost percentage against sales each week.
• contribution margin: the sale price of a dish minus its variable costs.
• inventory turnover: how often you sell and replace stock, which stays high for fresh food.
• break-even point: the sales level where total revenue matches total costs.

Key point: Aim for food cost of 28–35% of revenue and a prime cost of 55–60%. COGS typically takes about one-third of gross revenue, so small movements here decide your margin.

Factor menu pricing into every KPI above, since it drives both food cost and contribution margin. To set the reports up from scratch, our restaurant bookkeeping templates give you a starting point.

Software, an accountant or both?

Most UK restaurants use both accounting software and an accountant. Software handles day-to-day records, while an accountant handles tax planning and year-end accounts.

Accounting software records sales, expenses and VAT and produces reports on demand. Popular options for UK restaurants include Xero, QuickBooks and Sage.

The bigger gain comes from linking that software to your ePOS system, so sales, VAT and COGS flow across without rekeying. Lightspeed, the unified ePOS and Payments platform for hospitality, connects the till to your books. Lightspeed’s restaurant accounting integrations push data into Xero, QuickBooks and Sage from one place.

An accountant earns their fee on tax returns, VAT complexity and advice as you grow. There is no legal requirement to hire one, but if you keep clean digital records you may only need them a few times a year.

Your next step with restaurant accounting

Restaurant accounting rewards a little setup. Get your records digital and review your numbers on a regular rhythm. Learn the VAT and tips rules that apply to you, and the rest follows.

If you are just starting out, our guide to basic hotel and restaurant accounting is a practical next read.

Timely, accurate accounting keeps you compliant and profitable. It also frees you to spend more time on the floor and the food.

Frequently asked questions

What is restaurant accounting?

Restaurant accounting is the process of recording, managing and reporting a venue’s finances, from sales and payroll to VAT. In the UK it also covers compliance with HMRC rules on VAT, tips and Making Tax Digital.

Do restaurants need to register for VAT?

Yes, a restaurant must register for VAT once its taxable turnover passes £90,000 in any rolling 12-month period. Below that threshold you can register voluntarily to reclaim VAT on costs.

What VAT do restaurants charge on food?

Restaurants charge 20% VAT on hot food and anything eaten in, while cold takeaway food is generally zero-rated. Alcohol is always standard-rated at 20%. HMRC’s VAT Notice 709/1 sets out the detail.

How do the new tip rules affect my restaurant?

The new tip rules require you to pass on 100% of tips to staff. This follows the Employment (Allocation of Tips) Act 2023, in force since 1 October 2024. You also need a written tips policy and must keep records for at least three years.

When does Making Tax Digital apply to me?

Making Tax Digital for VAT already applies to all VAT-registered businesses. MTD for Income Tax has applied since April 2026 for qualifying income over £50,000, then April 2027 for over £30,000 and April 2028 for over £20,000.

Should I use accounting software or an accountant?

Most restaurants use both accounting software and an accountant. Software keeps daily records and produces reports, while an accountant handles tax, VAT complexity and year-end accounts.

What is a healthy food cost percentage for a restaurant?

A healthy food cost percentage for a restaurant is usually 28–35% of revenue. Combined with labour, that feeds a prime cost of 55–60%, a key benchmark for profitability.