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Is Service Charge Gratuity? The Principal Differences Explained
Whenever you eat out in the UK, you might see “a service charge” or “a tip” as an additional line on your bill. This raises the question - Is Service Charge Gratuity?
Understanding this difference is quite important for both, customers and the restaurant employees.
Despite recent attempts to make both forms equitable in treatment, they are not legally the same. Let us explore the workings of service charges and gratuities at restaurants in the UK.
What is a Gratuity(Tip)?
A gratuity is something most people would popularly refer to as a tip. It is a discretional payment that a customer can give to a service provider as a sign of appreciating a job well-done. To give a gratuity is to give a tip in appreciation of good service.
In the UK for example, tips are not enforced by international law, but it is courteous and most expected to leave gratuities between 10 and 15 percent on the total restaurant bill if there is no service charge.
Tips are often cash, but can be added on payment cards or given over digital services. It is unspoken and common knowledge that fast-food, self serve, and takeaway food do not warrant tips.
What is a Service Charge?
A service charge is simply a set amount added to the customer bill by the establishment prior to offering the bill. The charge for these services is sometimes included in the total and can range from 10 to 12.5 percent, but this is not always set in stone.
Restaurants should make it known on the menu or receipt whether service charges are incorporated. Service fees are often voluntary, which customers can opt to give or not, or mandatory, which the customers are devoid of the choice of refusing.
Discretionary service charge: This charge is optional for customers. Clients can ask the company to remove this fee for any particular reason. Most restaurants use words like ‘Optional’ and ‘Discretionary’ to convey this type of charge.
Mandatory Service Charge: The customer is expected to pay this charge as it is included in the total price of the service. Even with mandatory service charges, the consumer is free to not pay if the service they received is of terrible quality due to the Consumer Rights Act 2015.
To clearly understand the distinction, here's a table highlighting the key differences between service charges and gratuities:
| Feature | Gratuity (Tip) | Service Charge |
| Initiation | Offered by the customer | Added to the bill by the restaurant |
| Mandatory? | Always voluntary | Can be mandatory or discretionary |
| Payment Timing | After service | Included in the bill presented before payment |
| VAT Treatment | Generally outside the scope of VAT if freely given | Mandatory: Standard rated; Voluntary: Outside scope |
| Legal Obligation | No legal obligation to pay | Obligation to pay depends on type and service quality |
Legal Standing: Not exactly the same.
It is true that service charges and gratuities may benefit those who work in hospitality, but the UK law does not see them as synonymous, and that is the Divide between them. However, the Employment (Allocation of Tips) Act 2023, which was effective October 1, 2024, will apply the same rules requiring a fair and clear pass on to employees for distribution. This law has a different core nature, and historical approach differs.
Before this Act, there was no requirement for restaurants to share service fees with employees. This raised the issue of whether these fees were simply adding to the restaurant’s profits instead of compensating employees for their work. The new law solves this issue by specifying that tips, gratuities, and service charges must be passed on in full (less tax) to employees.
The VAT approach indicates another area of law that is different from the rest. Mandatory service charges are charged VAT because they form part of the payment for the meal, unlike truly voluntary service charges and tips.
The Employment (Allocation of Tips) Act 2023: A Game Changer.
This legislation is perhaps the most important in changing the approach to service charges and tips in the UK hospitality industry. Some of the most important provisions for employers from this Act include:
Full Distribution: Employers must pay each employee the total amount of all tips, gratuities, and service charges without any deductive restrictions other than income tax.
Fair Allocation: Even agency personnel within the bounds of a particular business location are entitled to tips. They are to be fairly distributed, for instance, based on the number of hours worked, seniority, and the employee’s position.
Timely Payment: Tips also need to be paid out, at the very least, by the end of the month after the tips have been accrued.
Written Policy: All employees within a business entity must be able to view the policy detailing how tips are received and distributed because it must be in writing.
Record Keeping: Employers need to keep track of all tips obtained along with how these tips are apportioned for a period not less than three years. Employees must be informed that they can examine these records whenever they wish.
This is done to ensure hospitality employees fully benefit from customer goodwill and service charges by making sure that there is always fairness and transparency in the tipping system.
Customer Rights and Service Charges
A user located in the United Kingdom has particular liberties with regard to service charges. In the case of a discretionary service charge, you may opt to not settle it no matter how well the service was conducted.
If you are irritated about the quality of service, you have the right to have it removed.
A service charge is generally included in the price. However, under the Consumer Rights Act of 2015, you can opt not to pay this fee if the service was provided poorly.
To avoid confusion, restaurants must inform the customers of their policies regarding service fees prior to service – typically through the menu or in person.
The focus of the new legislation is on transparency with regards to how tips and service charges are managed. Restaurants need to mention service charge fees as either discretionary or mandatory on bills and menus.
Customers have the right to expect that tips and service charges will be distributed to the staff that actually rendered the service.
In conclusion, The Employment (Allocation of Tips) Act 2023 states that both tips and service charges will be treated with the same rhythm in their distribution amongst restaurant staff; however, they still aren’t legally identical.
Tips are optional expressions of customer satisfaction, whereas a service charge is a designated fee a restaurant adds to the bill which can be voluntary or involuntary.
Knowing these aspects, particularly the laws and regulations that govern them enables both customers and employees in the hospitality sector in the UK to operate effectively.
This new law is a fundamental shift towards fairness and greater accountability for workers in the service sector.
We hope the difference between a service charge and gratuity is clear now.
If you are looking to simplify your restaurant operations and streamline pre-orders and payments, check this out.
Resources:
https://www.gov.uk/government/publications/e24-tips-gratuities-service-charges-and-troncs/guidance-on-tips-gratuities-service-charges-and-troncs
https://startups.co.uk/payment-processing/service-charges-uk/
https://wise.com/us/travel-money/tip-calculator/united-kingdom
https://en.wikipedia.org/wiki/Gratuity
https://www.gov.uk/government/publications/e24-tips-gratuities-service-charges-and-troncs/guidance-on-tips-gratuities-service-charges-and-troncs
Photo by Vitaly Gariev: https://www.pexels.com/photo/people-in-a-restaurant-23496892/