I noted that the HMRC guide (http://www.hmrc.gov.uk/helpsheets/e24.pdf) and also noticed tips on your website (www.taxinsider.co.uk/228-Do_you_incur_service_charges_at_the_restaurant.html#options) says if customers have a genuine option to pay a service charge (e.g. contain the word ’discretionary‘) - even if the amounts appears on the invoice - it is outside the scope of VAT.  But I cannot find any guide about if the customers do have a genuine option to pay the service charge (even it appears on the bill), but service charges are not delivered to the employees, only the tips do. In this situation, is the service charge still outside the scope of VAT?

Arthur Weller Replies: 

Here is a quote from page 4 of E24(2010) ‘Tips, Gratuities, Service Charges and Troncs’ published by HMRC:

"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."

It appears from this that the service charge is still out of the scope of VAT in your scenario.