Key Advice From the Accountants for Hospitality Businesses: How to Avoid Tax Traps

Reports earlier this year found that as many as a third of businesses in the hospitality sector were trading at a loss, as companies struggled with the increases in NICs, business rates, minimum wage reforms, and NIC thresholds.

Separate articles have also reported the loss of almost 90,000 jobs over the nine months to August 2025, primarily due to junior and part-time recruitment becoming unfeasibly costly for hospitality providers to maintain.

These significant challenges mean that tax efficiency is more essential than ever for companies that are juggling higher trading costs and payroll budgets, alongside increased tax obligations. With the right advice, many hospitality businesses will find that there are several ways to mitigate cost pressures and ensure they are trading sustainably.

Tax Pressures Impacting UK Businesses in the Hospitality Sector

It will come as no shock that almost all companies in the hospitality industry have found navigating recent months hard work, to a greater extent than in many other sectors. 

Although all businesses have needed to manage cuts in business rates relief and the changes to employment taxes we’ve mentioned, in this sector, organisations have also faced:

• Increases in duty applied to most alcoholic drinks, excluding only some draught products.
• Speculation around changes to duties on in-house games, known as Machine Games Duty.
• Proposals to introduce unified Deposit Return Schemes for drinks containers.

While the right approach will depend on your company’s current position, cash flow stability, risks, and long-term prospects, starting by reviewing tax exposures, eliminating mistakes, and ensuring you’re claiming all allowances and reliefs is a good way to become more financially resilient.

Tax-Efficiency Errors Hospitality Companies Often Make

Part of the reason our hospitality accountants are in such high demand is that every business has to deal with the complexities of different VAT rates for services and handling aspects like tips, service charges, and reservation deposits.

It is, therefore, unsurprising that we encounter common mistakes, most of which can be easily rectified by auditing the accuracy of record-keeping and implementing systems to minimise the potential for error in the future.

Below, we’ve summarised some examples to demonstrate the number of areas in which hospitality companies may stand to make immediate cost savings.

Misunderstanding VAT Rates

There are numerous categories of goods and services that attract a zero or reduced VAT rate. Businesses that account for every transaction at the standard 20% could be both overcharging customers unnecessarily and paying HMRC the wrong amount.

Ideally, all firms should use software that automatically assigns the correct VAT rate, but there may also be a case for employee training and updated POS systems that don’t enable personnel to enter transactions with the wrong rate.

The same issue can apply if services or goods are incorrectly charged at a lower VAT rate, and repeated inaccuracies can create an increased risk of a VAT audit and compliance action.

Outdated Record Keeping

Entering data into your accounting software can be an administrative burden, but failing to maintain up-to-date records can be a serious issue, without having clear records of sales, VAT collected and paid, and revenues.

Our hospitality accountancy team can, of course, assist with accounting clean-up services to bring your reporting up to speed before filing accounts and tax returns. Still, the reality is that missing transactions and inconsistencies between till receipts and invoices can increase the likelihood of mistakes.

In many cases, we can recommend agile, cloud-based accounting software that will automate a large proportion of manual data entry tasks, reconcile accounts quickly, and flag transactions that have been categorised inconsistently to ensure hospitality firms have a clear picture of their performance and financial health.

Not Claiming Available Tax Reliefs

Hospitality covers a broad range of businesses, and the tax relief relevant to your organisation may not include all of the following. However, if you are eligible and aren’t claiming reliefs, you could very possibly be paying more tax than you should:

• Small Business Rates Relief: Companies that occupy premises rated at a value of £15,000 or below can claim up to 100% relief on a sliding scale.
• Retail Hospitality and Leisure Relief (RHL relief) is specifically designed for hospitality firms. During the current tax year, it provides up to a 40% reduction in rates, capped at £110,000.
• Capital Allowances: Many businesses fail to deduct capital allowances when declaring taxable profits, which can include kitchen equipment, furnishings, computers, and delivery vehicles.
• Employment Allowances: SMEs are entitled to claim a reduction in Class 1 NICs of up to £5,000 per year – this usually needs to be registered through payroll software.
• Draught Reliefs: The small reduction in duties we mentioned previously means that, from 2023, hospitality businesses that serve certain alcoholic drinks pay a lower rate – although this only applies when those beverages are served within a hospitality venue.

Some organisations may also be eligible to claim R&D tax credits, which provide an offset against expenses incurred when designing new systems or introducing sustainability policies. 

The Huge Importance of Accurate Tax Management for Hospitality Firms

We’ve covered only a proportion of the tax efficiency measures that may benefit your business, and this is before considering Making Tax Digital. These further reforms will affect companies that are due to become VAT-registered or independent hospitality professionals who will need to file returns via MTD-compatible software shortly.

All of these errors can result in fines, interest payments, and penalties for underpaid or underdeclared tax liabilities, as well as missed opportunities to take advantage of allowances and reliefs. They can also have an impact on the finances of hospitality companies that are already dealing with multiple pressure points.

Tax efficiency is vital, as it enables companies to adopt strategic tax planning to protect themselves from compliance issues and focus on maximising profitability.

If you’d like to discuss any of the tax traps mentioned here or need tax advice on the best ways to improve your record-keeping and tax management, you are welcome to get in touch with our hospitality industry specialists at James Todd & Co at your convenience.