Hospitality sector staff face VAT on service charges but tips stay tax free

EMPLOYEES WORKING in the hospitality sector will not be charged VAT on tips they receive from customers - but they do face a tax on service charges under arrangements being introduced next week.

While many view service charges and tips as interchangeable, there is a distinction - service charges tend to be compulsory and are added to the customer's bill before it is presented to them while a tip is not included on a bill.

The trade union Siptu yesterday warned that staff working in hotels and restaurants would suffer as a result of plans to tax those who are paid service charges.

From next Monday, a concession whereby service charges in hotels and restaurants were not taxed if they were distributed in full to staff, is to end. The concession, which operates widely throughout the hotel and restaurant sector, was meant to ensure that staff could receive gratuities which were intended for them, but included as part of the overall bill presented to a customer.

The Revenue Commissioners said last May it intended to withdraw the concession from September 1st, after which all service charges included in hotel and restaurant bills will be liable to VAT at 13.5 per cent.

Siptu has warned that while service charges are not as prominent in the hospitality sector as they once were, the decision to charge tax on them would be devastating for low-paid employees.

The union also said there was a lack of clarity over what was and was not liable for VAT under the new measure.

But the Revenue Commissioners said yesterday that voluntary payments such as tips made by customers, whether in cash or by credit card, and not included in bills, would remain outside the scope of VAT. The decision to withdraw the service charge concession follows a ruling made by the European Court of Justice (ECJ) in March 2001 in a case taken against the French government.

The ECJ ruled that the service charge concession was not valid and did not meet the obligations under the EU VAT directives.

As a result, France withdrew its concession in October of that year. The Irish Hotels Federation said withdrawal of the concession would have a "minimal impact" on the hospitality sector.

This article appears in the print edition of the Irish Times