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HMRC internal manual

National Insurance Manual

From
HM Revenue & Customs
Updated
, see all updates

Tips, gratuities and service charges: service charges

Introduction

It is common practice within the restaurant industry for businesses to add a service charge to a customer’s bill.

  Example  
     
  Customer’s bill for meal £100
  Service charge @ 10% £ 10
  Total amount payable £110

Compulsory service charges

Where a service charge is compulsory, the customer is obliged to pay. The amounts paid by customers for compulsory service charges are not gratuities or offerings and cannot be disregarded from earnings when calculating Class 1 NICs. It is unnecessary to consider whether either condition 1 or 2 of the gratuity disregard (NIM02905) is satisfied.

Donor or customer voluntarily pays more than the compulsory service charge

Where a donor or customer voluntarily pays more than the compulsory service charge, the amounts paid over and above the service charge are gratuities.

  Example  
     
  Customer’s bill for meal £100
  Service charge @ 10% £ 10
  Total amount payable £110
  Customer pays another £5 for the service provided  

In this example, if either condition 1 or 2 of the gratuity disregard (NIM02905) is satisfied, the extra £5 paid by the customers for gratuities can be disregarded from earnings when calculating Class 1 NICs liability.

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Voluntary or discretionary service charges

It is common practice in restaurants for voluntary or discretionary service charges to be added to customers’ bills. If a customer is not obliged to pay the service charge, the amount paid for the service charge is a gratuity.

Customers always pay voluntary or discretionary service charge

In some establishments it is rare for customers to refuse to pay all or part of a service charge. This does not affect the true nature of the payment. HMRC accepts that a payment is a voluntary service charge if it is clearly presented to the customer as an entirely optional payment. The literature seen by the customer should reflect that and be consistent with advice given to customers by staff. If a service charge is voluntary or discretionary, the payment made by the customer is a gratuity.