VAT on restaurant service charges 'is wrong'

Date: 18th August 2008

The owners of small restaurants are not right to add 'optional' or 'discretionary' service charges on bills that already included VAT.

Writing in the City Diary section of the Times, journalist Dominic Walsh explained that he had spent a significant amount of time last week arguing with an HM Revenue & Customs (HMRC) spokesperson about the legality of restaurants adding optional service charges to bills that already included VAT.

"I had asked whether restaurants were right to add such charges on bills that already included VAT. In other words, was it right that diners should effectively have to pay a service charge on VAT?" Mr Walsh explained.

While the HMRC spokesperson initially said that restaurants were "doing nothing wrong" as a service charge was considered VAT-inclusive, he later contacted Mr Walsh and admitted that some of the information he had provided was incorrect.

According to the article, the HMRC spokesperson confirmed that "if a service charge is described as optional or discretionary, this is outside the scope of tax, so no VAT is due on it".

Recently, plans to introduce a standard rate of VAT across all goods and services in the UK were slammed by the Tax Research LLP pressure group.