Wet, dry and what actually carries VAT
Wet sales are your drinks. Dry sales are your food. In a pub, nearly all of both carry 20 percent VAT, so the split matters far more for margin and stock control than it does for the VAT rate. A wet-led pub earns most of its money over the bar. A dry-led pub, often a gastropub, earns most of it from the kitchen. Plenty of sites sit somewhere in the middle and drift year to year as the food offer grows.
Why does the label matter if the VAT is the same either way? Because a wet-led site and a dry-led site are almost different businesses behind the till. One lives on draught yield, cellar management and pour accuracy. The other lives on food gross profit, chef wages and waste. The pub that understands which one it actually is, in numbers not gut feel, is the one that keeps its margin when costs move. We run the books for both kinds, and the mistakes are different in each.
This is the sort of detail a generalist misses and a specialist expects. If you want the wider picture on how a drinks-trade business should be set up and taxed, our bar and pub accountants page covers the whole service, from VAT and payroll to tronc and year-end. This guide zooms in on the two levers that decide what you actually bank: VAT and gross margin.
How VAT really works in a pub
Almost everything you sell is standard-rated at 20 percent. Every drink you pour, alcoholic or soft, is standard-rated. Any food eaten on the premises is standard-rated, and any hot food sold to take away is too. The only common zero-rated line in a pub is cold food bought to take away, and even that has exceptions: crisps, confectionery, ice cream and soft drinks stay standard-rated whether they leave the building or not. HMRC sets all of this out in VAT Notice 709/1 on catering and takeaway food and VAT Notice 701/14 on food products.
One myth worth killing early. There is no reduced hospitality rate to fall back on any more. The temporary 5 percent and then 12.5 percent rates that ran through the pandemic ended on 31 March 2022. Since then a pub charges the full 20 percent on drink and hot or eat-in food, full stop. If your bookkeeping still carries a reduced-rate code from 2021, it is wrong, and we still find it on takeover accounts.
Here is the number that lands. On a £5.00 pint, roughly 83 pence is VAT that you collect for HMRC and never keep. On a £14 plate of food eaten in, that is about £2.33 of VAT. You reclaim the VAT you pay on stock, utilities, repairs and a refit, so the net position is nowhere near 20 percent of turnover, but the point stands: a fifth of the money crossing your bar is not yours. That is exactly why the margin on what is left has to be right.
For the VAT return itself, the mechanics are the routine part: record output VAT on takings, reclaim input VAT on purchases, file quarterly under Making Tax Digital and pay the difference. Where it goes wrong is the till. A pub with mixed wet and dry income, machines, room hire and the odd zero-rated line needs its EPOS mapped to the right VAT codes, or the return quietly overpays or underpays every quarter. That mapping is part of what we set up on our VAT returns and Making Tax Digital service, and it is usually the first thing we fix on a new pub.
Wet vs dry margins: where the money leaks
Gross margin is the profit left after the cost of what you sold, and in a pub it varies wildly by category. As a working rule of thumb across the pub books we keep, draught beer runs the thinnest at around 50 to 55 percent, wine and spirits carry the wet side at roughly 65 to 78 percent, and food sits around 60 to 68 percent on paper. Those are ranges to test against your own site, not official figures, but the shape holds almost everywhere.
The trap is reading food's headline margin as if it were profit. It is not. Food gross margin looks healthy until you load the kitchen wages, the prep time, the waste and the spoilage onto it. A plate that shows 64 percent gross margin can end up contributing less to the bottom line than a round of spirits that showed 74 percent and took ten seconds to pour. This is why a dry-led pub can be busy every night and still struggle: the covers are there, but the food margin after labour is thin, and the wet trade that used to subsidise the kitchen has shrunk.
Draught is the other quiet leak. It is your lowest-margin line to begin with, and it is the one most exposed to wastage: over-pour, line cleaning, ullage, and the difference between the yield your brewer assumes and the yield you actually get. A pub pulling thousands of pints a week can lose a genuine slice of margin to a half-percent yield slip nobody is measuring. Weekly wet gross profit tracking against till data is the single cheapest control most pubs are not running.
The VAT Flat Rate Scheme and the 16.5 percent trap
The Flat Rate Scheme lets a smaller business pay a fixed percentage of its gross takings to HMRC instead of working out output tax minus input tax line by line. As at September 2026 the flat rate for a public house is 6.5 percent, set out on the gov.uk flat rate scheme page. On the face of it that looks generous next to 20 percent output VAT, but it only works if you reclaim very little on purchases, and a pub rarely fits that description.
Two things catch pubs out. First, if your food sales are greater than your bar sales, HMRC can require you to use the catering and restaurant category at 12.5 percent instead of the 6.5 percent pub rate, which changes the maths completely for a dry-led site. Second, the limited cost trader rule forces a 16.5 percent flat rate on any business that spends less than 2 percent of turnover, or under £1,000 a year, on goods. A pub normally spends heavily on stock, so it usually escapes that, but a bar with a tiny kitchen and mostly bought-in mixers can drift into it.
The honest answer for most established pubs is that the Flat Rate Scheme costs more than it saves, because you give up the input VAT you reclaim on stock, energy, repairs and any refit. Where it can win is a very wet-led, low-cost site, or the first year while a new pub finds its feet. It is a genuine model-both decision, not a default, and it is worth doing the sums before you join or leave.
The four numbers to watch in 2026/27
If you track four numbers this year, track these. They are the ones that move a pub's bottom line the most, and the ones a generalist tends to leave until the year-end accounts, by which point it is too late to act on them.
Four numbers a UK pub should watch in 2026/27
The figures that decide what you keep, checked monthly not annually
These four numbers, watched monthly, tell a UK pub operator far more than a set of year-end accounts read nine months late.
Business rates are the one that changed most this year, and the change is not the clean win it first looks like. From 1 April 2026 the temporary 40 percent retail, hospitality and leisure relief was replaced by permanently lower multipliers built straight into the bill. A pub with a rateable value below £51,000 now sits on a 38.2p multiplier rather than the standard 43.2p, and eligible pubs and live music venues get a further 15 percent relief for 2026/27, confirmed on the gov.uk pubs and live music venues relief notice.
Read the small print though. For a lot of pubs the lower multiplier is outweighed by two things: the loss of that old 40 percent discount, and a higher rateable value from the 2026 revaluation. The House of Commons Library sets out the moving parts in its briefing on business rates for pubs. The practical point is simple: do not assume 2026/27 left you better off. Pull your actual bill, compare it to last year, and if it has gone up, that is a cost to plan for, not a surprise to absorb in March.
Here is how the three common ways to handle a pub's VAT and margins actually compare:
| What a pub needs | DIY / EPOS software | Generic accountant | LOYALS specialist |
|---|---|---|---|
| Maps wet, dry and zero-rated lines to the right VAT codes | ✗ You self-code | ● If asked | ✓ Set up at onboarding |
| Tracks wet and dry gross margin weekly against till data | ● Reports exist, unused | ✗ | ✓ Monitored monthly |
| Models Flat Rate Scheme vs standard VAT for your site | ✗ | ● | ✓ Both modelled |
| Sets up a compliant tronc for table-service tips | ✗ | ● | ✓ From setup |
| Checks the 2026/27 business rates position against last year | ✗ | ✗ | ✓ Reviewed with you |
| Open for a call when the pub is open, Mon to Sat | ✗ | ✗ Mon to Fri 9 to 5 | ✓ 10am to 7pm Mon to Sat |
This is why wet-led and food-led operators tend to move from a generalist to a hospitality specialist once the margins start to matter.
The £90,000 threshold and mixed supplies
You must register for VAT once your taxable turnover passes £90,000 in any rolling 12 months, or if you expect to pass it in the next 30 days. Because nearly all pub takings are standard-rated, almost every established pub is well over the line and already registered, so for most operators this is not a live question. It becomes one for a brand new site, a very small community pub, or a pop-up, where the first months of trade decide when registration bites.
Where mixed supplies do matter is the odd genuinely zero-rated line. If you sell cold sandwiches or a bag of coffee beans to take away, those are zero-rated, and they still count toward the £90,000 taxable turnover test even though no VAT is charged. It rarely changes a pub's registration position, but it does change the VAT return, and it is one more reason the till mapping has to be right. If you want to sanity-check where your business sits before committing to anything, our bookkeeping service handles the reconciliation that keeps the return clean, and our guide to what a pub accountant costs covers the fee side.
What this typically costs at LOYALS
- Single-site pub, monthly payroll and accounts: from £500 a month
- Single-site pub with weekly rota payroll or a tronc scheme: from £795 a month
- Tronc scheme setup for table-service tips: £395 one-off
All fees exclude VAT and are fixed for twelve months. Quotes are issued in writing within 24 hours after a 15-minute call, and we do not take on ongoing work below £500 a month. See full price list.
What to do before your next VAT quarter
None of this needs a finance degree. It needs the right numbers in front of you at the right time. Before your next VAT quarter closes, work through these:
- Check your till coding. Confirm drinks, hot and eat-in food are standard-rated, any cold takeaway is zero-rated, and no stray reduced-rate code has survived from 2021. One wrong button skews every return.
- Split your margins. Pull wet gross margin and dry gross margin separately for the last quarter. If you have never seen them apart, that number alone is worth the exercise.
- Measure draught yield. Compare the pints your EPOS says you sold against what the cellar actually delivered. A persistent gap is wastage or over-pour, and it is fixable.
- Model your VAT scheme. If you are on, or tempted by, the Flat Rate Scheme, run the standard-accounting comparison including your stock and refit input VAT before you decide.
- Pull your business rates bill. Compare 2026/27 against last year and confirm whether the new multiplier and the 15 percent pub relief actually left you better off or worse.
Do these five and you will know more about where your pub makes and loses money than most operators learn in a year. If you would rather it was handled, that is what we do: LOYALS keeps the books, runs the VAT and sets up tronc for pubs across London and the UK, so we see exactly where the wet and dry margins leak and we fix them before they reach the year-end.