The treatment of service charges depends on whether they are “voluntary” or not. If the charge is simply included in the bill, then it is part of the restaurant’s turnover (for VAT as well as income tax or corporation tax), and any payments to employees go through the payroll in the same way as their wages. If the service charge is genuinely voluntary, and it is made clear to the customer that he does not have to pay it unless he wishes to do so, then from the restaurant’s point of view this is outside the scope of VAT. What happens when the tips or service charges are distributed to employees depends on how this is done.
This tip was first printed in Tax Insider in August 2009.