Having previously suggested that the big issue for the UK hospitality industry this year could be tips, gratuities and cover charges, the reality is that the iceberg is nearing our shores, and it’s far from clear if anyone is ready to deal with it.
Some restaurant businesses have jumped the gun and are committed to changing their pricing structures to inclusive so that service charges and gratuities are no longer added separately to the customer’s bill, and tipping is neither necessary nor encouraged.
How is this justified by them?
- you don’t need to worry how much to leave
- or worry whether the staff get whatever is charged or you leave
- wages will be paid ’in full’
- earnings for mortgage or other purposes will make it easier to secure loans and mortgages
- the era of having to work for tips is coming to an end
Most of the media attention about this subject has been limited to questioning whether all tips and service charges should belong to the staff.
As there are no standard practices in the UK in restaurants, bars and hotels, and neither the public, the staff nor the businesses have an appreciation of what happens when the legislation and tax rules have also to be applied, attempts to reach a balanced consensus on this subject are not that simple.
In principle, the all-inclusive approach should help to clear the air and level the playing field. But there is part of the iceberg that is invisible and that has a bearing on whether this is the best solution.
Here is a simplified example to try to show what happens (all figures indicate £):
Example A
The restaurant menu price now (that includes VAT) 50.00
Add a 12.5% discretionary service charge 6. 25
Bill Total 56.25
This breaks down as:
To the business to cover its operating costs
including at least minimum wages 41.67
VAT (not on the service charge as payment is discretionary) 8.33
Amount including VAT 50.00
Service charge (not subject to VAT)
12.5% of the menu price, payable to the staff 6.25
Bill Total 56.25
Example B
Now let’s go inclusive, and keeping to the same amount for
operating costs and payable to the staff 41.67+6.25 47.92
VAT would become payable on this total at 20% 9.58
Bill Total 57.50
Note that the Bill Total has to go up by £1.25, and the whole of this goes to HMRC as extra VAT.
It does not end there. If the restaurant currently has an approved tronc sharing system for service charge paid to the staff – and here we are assuming it is all paid out to the staff – then this is what will happen if the equivalent amount becomes part of their pay from the business (based on 2016/17 rates):
Paid to the staff as a cost to the business 6.25
As before this will be subject to income tax at whatever rate applies to each individual’s total earnings.
For the employer there will also be:
Extra Employer’s National Insurance 13.8% 0.86
Extra Employer’s Workplace Pension Cost minimum 1% 0.06
Additional cost to the restaurant 0.92
Example C
If the restaurant wants to recover these extra National Insurance and pension costs from the customer, the amount to be added to the bill would be subject to VAT.
The Bill would then become, as B above 57.50
Extra employer costs 0.92 + VAT 0.18 1.10
Bill Total 58.60
For the customer this would result in an increase from the original £56.25 bill total of £2.35 or 4.2% All of this increase will go to the government in tax and NI charges.
And the consequences for the staff:
Extra cost for Employee’s National Insurance 12% 0.75
Cost for Workplace Pension contribution 2%. .12
Additional cost to the staff 0.87
In summary, the result of going inclusive ?
Winner
- The government – VAT on the former service charge and on any other cost recovery element
- The government – 25.8% of the service charge element will be paid in additional National Insurance contributions
Losers
- The customer – paying another 4.2% for no added value. Can that all be passed on to them ?
- The employee – out of pocket by 14% of their ‘extra’ pay compared to now. This could have been used for savings, living expenses and other discretionary spending
- The employer – paying to the government the cost of additional National Insurance and incurring workplace pension costs, totalling at least 14.8% of the amount formerly distributed. This would have been available to provide additional value to the customers and the employees.
To the above issues need to be added the future effects of the Living Wage and workplace pension contribution increases and the impending 0.5% Training Levy – including the effects of adjustments to related pay differentials and whatever is needed to recover any other operational cost increases.
The UK hospitality industry urgently needs to understand the size of this iceberg and to influence how to bring it under control. All the affected parties need to be involved in reaching a consensus that will create a fair and transparent solution to what will otherwise continue to be a growing problem and a national embarrassment.
About the author
Howard Field is a HOSPA Founder Member, Honorary Fellow, and member of the HOSPA Finance Committee.
References:
Tip of the Iceberg article in The Overview, January 2016
Times 2 Article by Nick Curtis on 3 March 2016
