Tax Relief on tips/descretionary service charges you pay while on business

We all know the types of services where there could be an expectation to pay a tip, such as waiters, taxi drivers or concierge - but what is the tax man's opinion? Before understanding the tax treatment of a tip, it is important you understand our articles on: 

• Travel Expenses 
• Subsistence Expenses 
• Client Entertainment 
• Staff Entertainment 

All the above scenarios are commonly incurred when you might feel obliged to pay a tip to the person providing you with a service.  

The principle that allows you to claim tax relief in your accounts, and reimburse your employees without PAYE complications 

The general rule is that expenses must be “wholly, exclusively and necessary” for business purposes. Nonetheless, HMRC rules can be complex and are often based on concepts such as the ‘fairness’ and ‘reasonableness’ of expenses claimed. 

The ability to claim tips you pay while on business is dependent on two aspects: 

• The employee's ability to claim the cost as a business expense: For example, if a meal is an employee's business expense, either because it is part of business travelling or entertaining, then the tip would be allowable providing it is not excessive. 
• The ability of the company to claim it as a business expense: The 'wholly and exclusively' rule mean that expenditure is only deductible in calculating business profits if it is incurred only for business purposes. The expense must also carry the ‘necessary’ badge so that HMRC cannot contest that it wasn't necessary to tip - and it isn't allowed. 

Meal Tips 

Tips for servers or bartenders at a business meal are claimable business expenses in line with their nature following the rules surrounding subsistence as well as staff and client entertaining. Since there's no "tip expense" category on the tax return, you should claim tips as part of your total meal expense.  

Travel tips 

Other non-meal related tips to people like cabbies, valets, and maids can be written off as travel expenses. It is crucial to remember that you can’t claim for travelling to and from work unless you are travelling to a temporary place of work. 

Service charges 

These charges are added to the bill before giving the customer. A mandatory service charge would carry no risk when claiming because it falls under HMRC's "wholly exclusively and necessary" for business purposes. 

VAT on Tips & Service Charges 

At a restaurant for example you will notice there is commonly a service charge included on the receipt. If the service charge is mandatory, then VAT should have been charged in line with the VAT rate of the foods being served. 

However, if your tip is not mandatory and genuinely at the discretion of the customer, then it is not considered a VAT supply and therefore out of scope. This means there is no VAT is due. 

 Records 

To account for your expenses properly, you must keep accurate records of everything. Keep receipts of everything you spend and separate the business costs from the pleasure activities. You must also call to mind that you're legally bound to keep these records for at least six years. 

If you find working out what allowable expenses your limited company can claim hard, contact us for support. For more business expense tips - you can also follow us on Facebook, LinkedIn, Twitter, and YouTube.