A service charge is simply a customer’s subsidy for the wages the restaurant pays its staff © Getty
Experimental feature

Listen to this article

00:00
00:00
Experimental feature

As Christmas approaches, many of us will be heading out for a festive meal with colleagues, friends or family. But when the bill arrives, take a close look at the receipt. It may well make you say “Bah, humbug!”

Restaurants that add a fixed percentage service charge are effectively charging customers for paying their VAT. And by calling it “voluntary”, they are avoiding VAT on the amount of service charge itself. This double VAT whammy is propping up restaurants at the expense of diners and taxpayers in general.

Take the lunch I bought in London recently. Salads, pizzas and a glass of wine each. It cost £42.50 but the bill came to £47.81 because the restaurant — a big chain — had automatically added a 12.5 per cent service charge of £5.31.

When I got home, I put the bill into a spreadsheet. The £42.50 was the charge for the food and drink including VAT. That breaks down into £7.08 VAT due to HM Revenue & Customs and £35.42 which the restaurant keeps. By adding its own 12.5 per cent service charge to the whole lot, the restaurant was charging me 12.5 per cent on the £7.08 VAT. I was, in effect, paying 89p for the “service” of the restaurant doing its VAT account.

You might liken me to Scrooge for taking a dim view of this small hidden charge. But think how many people eat out every day — all of these small amounts can add up to some tasty profits for the restaurant groups.

It gets worse. Because the £5.31 service charge is, in theory, voluntary, it counts as money I give out of the goodness of my heart — or the confusion of my brain. It is not a charge made by the restaurant, so it is not subject to VAT. It goes to boost the wages of the staff — or should do — but by separating it out as money I pay directly for the staff and calling it voluntary, the restaurant avoids having to pay VAT on it.

If the restaurant added no voluntary service charge and put up the menu prices, I calculate they would have to rise by 15 per cent to ensure it ended up with the same amount before VAT (£35.42 plus my £5.31).


The VAT would then be £8.15 (not £7.08) and my total bill would be £1.06 more to reflect that — so £48.87 rather than £47.81 (numbers rounded). With a bit of fiddling about, price points of even pounds could be achieved — salad 6 rather than 7, wine 9 rather than 8½. I omit the £ signs as the restaurant menu did; it makes us care less about the amount apparently. These small price increases are not going to make the difference between visiting that restaurant or another.

I could have deducted the service charge. But the food and drink price of £42.50 was labelled “VAT TTL” rather than more honestly as “amount you can pay without the service charge”. That makes it hard to identify — especially when the card machine already shows the full amount including the service charge.

If we had waited an hour for our meal, the wrong dishes were brought, and when they arrived they were cold I might have considered refusing to pay the 12.5 per cent service charge. More likely, I would have complained to the manager and expected to get an item or two knocked off the bill, and then paid the service charge on the rest. Why should the waiting staff suffer for the failure of managers to run the place properly?

The service charge is simply my subsidy for the wages the restaurant pays its staff. I hope it goes to them, though in the past some restaurants have admitted that not all of it do. That is why I prefer to pay the tip in cash, even though I always pay the bill by card. I feel it is more likely to end up in the waiter’s pocket.

In my ideal world, restaurants would pay their staff at least the real living wage of £10.20 an hour in London, or £8.75 outside, reflect that cost in their menu prices, and account for their VAT in full. Then if I round the bill up or leave a couple of quid on the table, it is a genuinely voluntary act by me for good service.

A consultation on tips, gratuities, cover and service charges was launched by the previous government and closed on June 27 2016. Nearly 18 months on, the Department for Business, Energy and Industrial Strategy confirms we are still waiting for a response.

Paul Lewis presents ‘Money Box’ on BBC Radio 4, on air just after 12 noon on Saturdays, and has been a freelance financial journalist since 1987. Twitter: @paullewismoney

Get alerts on UK tax when a new story is published

Copyright The Financial Times Limited 2018. All rights reserved.

Follow the topics in this article