VAT on Tips


With Covid-19 restrictions making their way back into our lives we may not be eating at our favourite restaurants as frequently.

However, for the times we have, we may have been more generous in tipping, rewarding the efforts which the staff and restaurant have put in to keep us safe whilst in their establishment.
Have you ever wondered how those tips are treated for VAT purposes?

There are different types of tips, but what are they?

A customer may make different types of payment on top of the basic charge, but usually it will be one of the following:

  • mandatory service charge
  • discretionary service charge
  • gratuity paid to the employer as part of a cheque, credit/debit card payment
  • cash gratuity paid into a staff box or similar
  • cash gratuity handed directly to an employee

VAT treatment on tips

Tips are outside the scope of VAT when genuinely freely given. This is so regardless of whether:

  • the customer requires the amount to be included on the bill
  • payment is made by cheque or credit/debit card
  • or not the amount is passed to employees

Restaurant service charges are part of the consideration for the underlying supply of the meals if customers are required to pay them and are therefore standard rated for VAT.

If customers have a genuine option as to whether to pay the service charges, it is accepted that they are not a consideration (even if the amounts appear on the invoice) and therefore fall outside the scope of VAT.

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