If your restaurant sales are up but profit is down, the answer is almost always hiding in your prime cost, not your till roll. Turnover can climb every month while food cost, labour cost, VAT and rent quietly take a bigger share of every pound you bring in, until profit shrinks even though the restaurant looks busier than ever. This guide sets out the seven numbers a London restaurant owner should check this month, in the order that matters, before the problem grows.
What Does It Mean When Restaurant Sales Are Up But Profit Is Down?
Key Takeaways
- Sales growth does not equal profit growth. Check prime cost, not just turnover, every month.
- Prime cost above 65% to 70% of sales is a warning sign for most UK restaurants.
- VAT is charged at 20% on food and drink served for consumption on your premises, even when the raw ingredient would otherwise be zero rated.
- The National Living Wage rose to £12.71 an hour from 1 April 2026, pushing up labour cost percentage across the sector.
- Accommodation and food service businesses were the third highest UK sector for company insolvencies in the year to July 2026.
- Monthly management accounts, not just an annual tax return, are what catch a margin problem before it becomes a cash crisis.
In This Article
- Why Are UK Restaurant Profits Falling Even When Sales Are Rising?
- What Are the 7 Numbers Every Restaurant Owner Should Check?
- How Does VAT Affect Your Restaurant’s Profit Margin?
- Why Do Full Restaurants Still Run Out of Cash?
- What HMRC Changes Should London Owners Prepare for in 2026 and 2027?
- How Can a London Accountant Help Turn Sales Into Profit?
- Frequently Asked Questions
Why Are UK Restaurant Profits Falling Even When Sales Are Rising?
Across London and the rest of the UK, plenty of restaurants are taking more money at the till than they did last year, yet the bank balance tells a different story. The Insolvency Service’s Company Insolvency Statistics for the year to July 2026 show that accommodation and food service businesses accounted for 3,221 company insolvencies, 14% of all cases where the industry was recorded, making hospitality the third highest sector for company failures after construction and wholesale and retail trade. Rising sales did not save most of those businesses.
Three forces are usually behind restaurant sales being up while profit is down: rising input costs, rising labour costs, and margins that were already thin before the growth started. Food inflation has pushed up the cost of meat, dairy and imported ingredients. The National Living Wage rose to £12.71 an hour from 1 April 2026 for workers aged 21 and over, and the National Minimum Wage for 18 to 20 year olds rose to £10.85, adding real cost to every shift on a restaurant rota. At the same time, rent, business rates, energy and insurance renewals rarely fall.
None of this shows up clearly on a sales report. A restaurant can be fuller than ever and still be losing money on every cover, because the sales figure hides what happened to cost. We regularly see London restaurant owners come to us after a strong summer, convinced the business is thriving, only to find prime cost has crept up by four or five percentage points without anyone noticing.
What Are the 7 Numbers Every Restaurant Owner Should Check?
When restaurant sales are up but profit is down, work through these seven numbers in order. Each one points to a different part of the business, and together they explain almost every profit problem we see in London kitchens and dining rooms.
1 Prime Cost
Prime cost is your food cost plus your total labour cost, including PAYE, employer’s National Insurance and tronc payments, expressed as a percentage of sales. It is the single most useful number in restaurant accounting because it moves with both the kitchen and the floor. Most full service UK restaurants should aim to keep prime cost between 60% and 65% of sales. Above 70%, very little is left to cover rent, rates, utilities, VAT and a return for the owner, however busy the dining room looks.
2 Food Cost Percentage
Food cost percentage is the cost of the ingredients used to produce what you sell, divided by food sales. A well run kitchen typically runs a food cost of 28% to 32% of food sales. Portion drift, supplier price rises that never reach the menu, and waste in prep are the three most common reasons this creeps up without anyone deciding it should.
3 Labour Cost Percentage, Including Tronc
Labour cost percentage covers wages, employer’s National Insurance, pension contributions and any tronc scheme, a system for pooling and fairly distributing tips and service charges among staff, shown as a share of sales. A healthy range for most London restaurants sits between 28% and 35% of sales, though this varies by service style. Since the Employment (Allocation of Tips) Act 2023 came into force, tronc must be distributed fairly with clear records kept, so your scheme needs its own paperwork, separate from ordinary payroll. Our guide to managing payroll for hospitality businesses in London covers how to set this up correctly.
4 Gross Profit Margin, Food and Drink Split Separately
Gross profit margin is sales minus the direct cost of goods sold, shown as a percentage of sales. Measuring food and drink separately matters because drink margins are usually far higher than food margins, so a restaurant that quietly sells less wine and more food can see total sales rise while overall gross margin falls.
5 Break Even Point
Break even point is the level of sales needed each week or month to cover every fixed cost, from rent and business rates to insurance and loan repayments, before a single pound counts as profit. Without this number, a busy Friday feels like success and a quiet Tuesday feels like failure, when neither tells you whether the month as a whole made money. If business rates are a large part of your fixed costs, it is also worth checking whether your site still qualifies for restaurant business rates relief in 2026.
6 Average Spend Per Head and Table Turnover
Average spend per head is total sales divided by covers served, and table turnover is how many times each table is used in a session. A restaurant can grow covers while average spend per head quietly falls, for example through more discounting, more set menus, or lower drink attachment rates, which increases sales while shrinking the margin on every visit.
7 Net Profit Margin After VAT and Overheads
Net profit margin is what is left after every cost, including VAT that cannot be reclaimed, rent, rates, utilities, insurance, marketing and finance costs, shown as a percentage of sales. This is the number that actually answers the question in the title of this article. A typical healthy net profit margin for a full service UK restaurant sits between 3% and 5%, so even a small rise in prime cost or overheads can wipe out most of the year’s profit.
The 7 Numbers at a Glance
| Number | What It Measures | Healthy UK Benchmark |
|---|---|---|
| 1. Prime cost | Food cost plus total labour cost as a % of sales | 60% to 65% |
| 2. Food cost percentage | Ingredient cost as a % of food sales | 28% to 32% |
| 3. Labour cost percentage | Wages, NI, pension and tronc as a % of sales | 28% to 35% |
| 4. Gross profit margin | Sales minus cost of goods sold, food and drink split | Food 65% to 72%, drink 70% to 80% |
| 5. Break even point | Sales needed to cover all fixed costs | Site specific, recalculate monthly |
| 6. Average spend per head | Total sales divided by covers served | Track the trend, not one fixed target |
| 7. Net profit margin | Profit after VAT and all overheads | 3% to 5% |
How Does VAT Affect Your Restaurant’s Profit Margin?
VAT is one of the biggest, and most misunderstood, drags on restaurant profit. Under HMRC’s VAT Notice 701/14 on food products, most food for human consumption is zero rated, but that changes the moment it is supplied in the course of catering. Hot food, food eaten on your premises, and most hot takeaway food must be standard rated at 20%, regardless of what the ingredients would be zero rated as on a supermarket shelf. That 20% is calculated on your selling price, not your cost, so it has a direct effect on margin the moment turnover rises through price increases rather than genuine extra covers. Getting the VAT treatment right on your menu also matters when rates change, as our recent piece on the temporary 5% VAT rate on kids’ meals and till pricing explains.
Once taxable turnover passes £90,000 in any rolling 12 month period, a business must register for VAT within 30 days of the end of the month the threshold was crossed. Many independent cafes and smaller restaurants sit close to this line, and crossing it without adjusting menu pricing or supplier arrangements can turn a profitable month into a loss making one overnight, because 20% of every sale now has to be handed to HMRC rather than kept. If you are close to £90,000 in rolling turnover, this is a number worth checking every month, not just at year end.
Why Do Full Restaurants Still Run Out of Cash?
A restaurant can be fully booked every night and still run out of cash, because profit and cash are not the same thing. Deposits taken today, delivery platform payments settled weeks later, staff wages paid weekly, and supplier invoices due on 30 day terms all move at different speeds, and a growing restaurant needs more working capital to bridge that gap, not less. Our related article, My London Restaurant Is Full Every Night, So Why Is There Nothing in the Bank, looks at this exact pattern in more detail, including how delivery platform commissions and VAT timing affect a restaurant’s bank balance even during a strong trading period.
Monthly management accounts, rather than waiting for the year end tax return, are what catch this early. A management accounts pack should show prime cost, cash flow and net margin every single month, not once a year after the numbers are already history.
What HMRC Changes Should London Restaurant Owners Prepare for in 2026 and 2027?
Two changes matter most for restaurant owners over the next two years. First, Making Tax Digital for Income Tax (MTD ITSA) is being phased in for sole traders and landlords. Anyone with qualifying income over £50,000 in the 2024 to 2025 tax year had to start using MTD ITSA from 6 April 2026, keeping digital records and sending quarterly updates to HMRC instead of one annual Self Assessment return. From 6 April 2027, the threshold drops to £30,000, which will bring many more independent restaurant and cafe owners who trade as sole traders or in partnership into the regime. If your restaurant is run through a limited company, MTD ITSA does not apply to the company directly, but it will apply personally to any director who also has separate qualifying self employment or property income above the threshold.
Second, the National Living Wage and National Minimum Wage rates normally rise again each April, and with labour already making up 28% to 35% of most restaurant sales, even a modest increase changes prime cost across every shift pattern. Building the announced rate into your rota costing before it takes effect, rather than after the first payroll run of the new tax year, avoids a nasty surprise in month one.
How Can a London Accountant Help Turn Restaurant Sales Into Profit?
GM Professional Accountants works with restaurant and hospitality clients across London and Essex, from single site restaurants near Ilford and Wimbledon to multi site groups trading around Old Street and across East London. We build monthly management accounts around the numbers in this article, set up tronc schemes correctly under the Employment (Allocation of Tips) Act 2023, handle VAT registration and returns for hospitality businesses, and prepare Self Assessment and MTD ITSA filings for owners who trade as sole traders or in partnership. Fixed monthly fees mean you know the cost of getting this right before you commit, and Xero based bookkeeping keeps prime cost, food cost and labour cost visible between visits, not just at year end.
Frequently Asked Questions
What is the first number to check when restaurant sales are up but profit is down?
Start with prime cost, your combined food and labour cost as a percentage of sales. If prime cost has crept above 65%, it usually explains most of the profit fall on its own, even before you look at rent, VAT or other overheads.
What is a healthy prime cost percentage for a UK restaurant?
Most full service UK restaurants should aim to keep prime cost, food cost plus total labour cost, between 60% and 65% of sales. Quick service concepts can run slightly lower, while fine dining often sits a little higher because of staffing ratios.
Why does VAT reduce restaurant profit even when sales grow?
Food and drink served for consumption on your premises, and most hot takeaway food, are standard rated at 20% under HMRC rules, calculated on your selling price. As sales rise, the VAT due rises with it, so price led sales growth does not automatically translate into more profit unless costs are controlled at the same time.
What labour cost percentage should a London restaurant aim for, including tronc?
A healthy range for most London restaurants is 28% to 35% of sales, covering wages, employer’s National Insurance, pension contributions and any tronc scheme. Since the Employment (Allocation of Tips) Act 2023, tronc must be recorded and distributed fairly, so keep it separate from ordinary payroll for clear reporting.
How often should a restaurant review its management accounts?
Monthly. Waiting for an annual tax return means a margin problem can run for most of a year before anyone sees it. Monthly management accounts that track prime cost, cash flow and net margin catch the problem while it is still small and fixable.
Does Making Tax Digital for Income Tax affect sole trader restaurant owners?
Yes, if you trade as a sole trader or in partnership rather than through a limited company. Anyone with qualifying income over £50,000 must have started using MTD ITSA from 6 April 2026, and the threshold drops to £30,000 from 6 April 2027, bringing many smaller independent restaurant owners into digital quarterly reporting.
GM Professional Accountants serves restaurant and hospitality clients across London and Essex, with local knowledge of trading conditions from Old Street to Ilford, Wimbledon and beyond.
Turn Rising Sales Into Real Profit
If your restaurant’s sales are up but profit is down, do not wait for the year end accounts to find out why. Talk to a London accountant who works with restaurants every day.
Disclaimer: This content is for general guidance only and does not constitute financial or tax advice. Tax rules change and how they apply depends on your individual circumstances. Please speak to a qualified accountant before acting on anything here.
