VAT & VAT Reporting for Pubs and Restaurants: Common Pitfalls and How to Avoid Them

Let’s be honest: when you decided to run a pub or restaurant, it wasn’t because of your love for VAT reporting. While perfecting the perfect pint or crafting a tantalising dish is the fun part, VAT and VAT reporting is an unavoidable and crucial element that needs to be handled with care. Whether you’re a seasoned landlord or a restaurant owner just finding your feet, it’s essential to avoid the common pitfalls that could lead to costly mistakes.

In this blog, we’ll highlight some of the most common VAT and VAT reporting errors pubs and restaurants make — and more importantly, how you can avoid them to keep your business on the right side of HMRC.

Misunderstanding VAT Rates
One of the most frequent mistakes in the pub and restaurant industry is misunderstanding which VAT rates apply to which goods and services. While the standard VAT rate is 20%, not everything you sell will fall under this category. For example, alcoholic beverages will incur the standard rate, but some food and drink items for takeaway may qualify for the reduced rate of 5%, or even zero-rated for certain cold takeaway items.

The trick is to ensure you apply the correct VAT rate to each item, or you could end up under- or overpaying VAT. Using accounting software like Xero can help you automate this process and ensure VAT rates are applied accurately. Keeping an updated list of items and their applicable VAT rates can save you from a headache later on.

Failing to Track Cash Sales Properly
In a busy pub or restaurant, it’s easy for cash transactions to slip through the cracks. But failing to track these properly is like serving a pint with a big frothy head — it’s bound to spill over into trouble. HMRC is especially keen on accurate cash reporting, and discrepancies can raise red flags, potentially leading to investigations.

To avoid this, ensure that every sale, whether card or cash, is recorded diligently. Investing in a modern POS system that integrates with your accounting software will make this process smoother and help ensure that no cash slips through the net. It’s also worth regularly reconciling your cash takings with your bank deposits to avoid any inconsistencies.

Incorrectly Claiming VAT on Expenses
Running a pub or restaurant comes with numerous expenses — from food and beverage supplies to furniture, equipment, and even staff uniforms. While you can reclaim VAT on many of these purchases, it’s essential to understand which items are eligible.

For example, VAT can be reclaimed on goods used for business purposes, such as kitchen equipment or cleaning supplies. However, VAT cannot be reclaimed on personal expenses or those that don’t directly contribute to running the business, like staff meals. A common pitfall is overclaiming VAT on non-eligible items, which could result in HMRC penalties.

Keep an Eye on Labour Costs
Managing your staff effectively can make or break your daily financial success. Labour costs can quickly spiral out of control if not kept in check. Ideally, you should aim for a labour cost percentage of around 30% of your total sales.

To achieve this, ensure that your staffing levels match the demand. Do you really need three bartenders on a slow Tuesday afternoon? By adjusting shifts based on your daily sales data, you can save on labour costs while still providing excellent customer service.

To avoid this mistake, keep all receipts and invoices organised and clearly distinguish between business and personal expenses. Again, using accounting software will help track these automatically and ensure only eligible expenses are claimed.

Missing VAT Deadlines
Missing VAT filing deadlines is one of the most common and easily avoidable pitfalls in VAT reporting. HMRC doesn’t take kindly to late submissions, and even one missed deadline can result in penalties. What’s more, repeated late filings can lead to even harsher consequences, including interest on unpaid VAT.

The best way to avoid this is to be prepared well in advance. Set reminders for VAT deadlines and aim to submit your returns early. Many modern accounting systems, such as Xero, can handle VAT submissions directly, giving you one less thing to worry about when juggling all your other responsibilities.

Overcomplicating Your Approach
The hospitality industry already has enough complexities without adding unnecessary layers to your tax process. Some businesses fall into the trap of overcomplicating their VAT calculations, thinking they need to split every penny into dozens of categories.

While accuracy is essential, overthinking the process can lead to mistakes or burnout. Keep it simple but thorough. Stick to straightforward systems and review them regularly. A good accountant or tax advisor can streamline your processes, saving you time and headaches.

Conclusion: Consistency is Key
Navigating VAT and VAT reporting doesn’t need to be a minefield. Avoiding common pitfalls like misunderstanding VAT rates, missing deadlines, and failing to track cash sales will keep your pub or restaurant in HMRC’s good books — and prevent unnecessary penalties. With the right tools and a little bit of planning, you can ensure your finances are as smooth as a freshly poured pint.

So, keep your records tidy, stay on top of your deadlines, and let technology do some of the heavy lifting — that way, you can focus on what really matters: running a successful pub or restaurant.