VAT Implications on Gratuities, Tips and Service Charges
Additional payments by restaurant customers are referred to as gratuities, tips or service charges. They are a ‘bonus’ given by the customer in addition to the standard charge for meals.The VAT implication of this is that if freely given, they are outside the scope of VAT as they are not part of the consideration for the supply and therefore such payments are not subject to VAT and restaurants are not required to make any VAT payment to HMRC.
Service charges in Restaurants
The main supply in a restaurant is the meal and compulsory service charges that are additional to the standard price are part of the consideration for the supply of the meal. Therefore they will follow the same liability as the meal and this applies even if they are passed on in full to staff as bonuses.Optional service charges were originally also treated as part of the supply of the meal. This changed in May 1982 when we accepted they are not consideration if customers have a genuine option as to whether to make an additional payment.
This approach applies even if the amount appears on the bill. This is because it is the menu that sets the contract between the restaurant and the customer. Therefore, where a menu states that service charges are optional the bill comes too late to change this contract and so any additional charges are not part of the consideration for the meal.