May 20, 2008
More on service charges
In response to my criticism of the poor economics of the practice of automatic service charges, a loyal reader comments:
The system of “optional” service charges being added to restaurant bills is in fact in our (as customers) interest. If the restaurateur operates the scheme properly and with due regard to HMRC’s guidance notes (see http://www.hmrc.gov.uk/helpsheets/E24.pdf) the tips effectively form part of the staff’s wages but are not liable to National Insurance deductions. Similarly, the extra (discretionary) charge to us the customer is not liable for VAT.
This means that the system of discretionary service charges enables the restaurateur to avoid an element of VAT and NIC payments and keep his prices lower than they would otherwise have to be.
Hm - not only are such charges a bad pricing strategy, they appear to be tax-inefficient. Colour me baffled as to why they are catching on. Tim Worstall directs me to a post from a way back where he explores all this in much more detail.
It might be a minimum wage story. I know that tips /service charges that are processed through credit cards and so on are allowed to count towards the staffs minimum wage - discretionary tips (i.e. cash tips) are not. I imagine this difference has just come about for practical reasons - if service charges are centralised (i.e. on bills) it’s fairly easy for the employer to count them, but trying to keep an eye on every coin is tricky.
So, by encouraging tips to be non-discretionary the employer is effectively reducing their wage bill (and not paying any more tax because the wage given to the staff is the same). The losers here are the staff…
Posted by: Liam | May 20th, 2008 at 8:44 am | Report this commentThere is, or used to be, a cafe near Oxford Circus that carried this system further. The customer’s printed till receipt had the optional service charge written in biro.
Posted by: james c | May 20th, 2008 at 11:45 am | Report this commentService charges are presumably easier to track for income tax purposes, right? That’s more tax efficient than voluntary tipping, but not necessarily a good thing as either a server or a customer. When I give a cash tip, it is my hope that the deserving server will not fully report it to the tax authorities — all things considered, I’d much rather the money go to to him than to the government.
Posted by: Jacob | May 20th, 2008 at 6:25 pm | Report this comment