Service charge in UK restaurants: the law, VAT and how to show it

A UK restaurant can add a service charge, but it must choose: optional or compulsory. A genuinely optional (discretionary) service charge can be refused by the customer and is outside the scope of VAT. A compulsory one is part of the price: it takes the same VAT as the meal and must be included in the price you show on the menu. Either way, since 1 October 2024 every penny of a service charge must go to your staff, shared fairly, under the Employment (Allocation of Tips) Act 2023.

This is general information, not legal or tax advice. Check your own set-up with HMRC, Acas or your accountant.

Optional or compulsory: what changes

HMRC decides "optional" from your menu, not your bill. HMRC's manual says the menu sets the contract, so a note that only appears on the bill comes too late to make a charge compulsory. The reverse also matters: calling a charge "optional" doesn't make it optional if staff won't remove it.

Does the tips law cover service charges?

Yes. The Employment (Allocation of Tips) Act 2023 covers tips, gratuities and service charges, and the statutory code of practice covers service charges added automatically as well as voluntary ones. Since 1 October 2024 you must:

1. Pass on all of it, with no deductions except those the law requires, such as income tax.
2. Share it fairly between the workers at each site, having regard to the code of practice.
3. Pay it out by the end of the month after the customer paid. A service charge paid on 23 June must reach staff by 31 July.
4. Have a written tipping policy if you get tips or service charges more than occasionally, and make it available to all workers.
5. Keep records for three years from the date each tip was paid. A worker can ask for them in writing once every three months.

You don't have to show your tipping policy to customers, but the code says you can, and it helps when a guest asks where the service charge goes. Our tipping law guide covers fair allocation, tronc, tribunal claims and the changes planned under the Employment Rights Act 2025. To split the money, use our free tronc calculator.

Card fees. The code allows no deductions from tips except very limited cases such as income tax, and it makes no exception for card processing fees. If card fees worry you, build them into your menu prices instead: see our card fees in menu prices tool.

How to show a service charge as optional

If you want the VAT and price-display treatment of an optional charge, the charge has to be genuinely optional for the customer. In practice:

• Say it on the menu, before people order: "A discretionary 12.5% service charge will be added to your bill. All of it goes to our team."
• Use the word on the bill too: label the line "Service charge (optional)" or "Discretionary service charge".
• Make removing it easy. Staff remove it when asked, with no questions and no pressure. On an online or QR order, the customer should be able to take it off themselves.
• Don't add it in ways customers can't avoid, such as building it into a set menu price or adding it after payment.
• Tell customers where it goes if they ask, and consider showing your tipping policy.
• Want it compulsory instead? Then put it in the menu prices, charge VAT on it and still pass it all to staff.

GOV.UK's code of practice describes a voluntary service charge as one where it's made clear to the customer that the amount is purely discretionary and there's no obligation to pay.

Worked example: a table of four

A table orders food and drinks worth £72.00, with prices that include 20% VAT. You add a 12.5% service charge.

Two things to notice:

• With the same £81.00 bill, the compulsory version costs you £1.50 more in VAT.
• A compulsory charge would also have to be in the headline menu prices under the price transparency rules, so most restaurants that add a service charge make it optional.

If the table used a £8.00 discount code first, a charge worked out on the food after discounts would be 12.5% of £64.00 = £8.00.

VAT on a service charge for takeaway and delivery

Service charges are mostly a dine-in practice, but the same VAT rule applies to any order. An optional charge stays outside the scope of VAT. A compulsory charge follows the VAT of what it's charged on: on a hot takeaway (20%) it's 20%; on a cold, zero-rated takeaway it follows that rate. For the food rates themselves, see VAT on takeaway food.

A tip the customer freely adds on top of your total isn't VAT-able either (VAT Notice 709/1, s.2.3).

How to add an optional service charge and tips in Menuthere

Menuthere's checkout can add both, and both are off until you switch them on. They're on every plan, including Free.

1. Go to Settings → Payments & tax and open Tips & service charge.
2. Switch on Add a service charge. Enter the rate in Service charge (%), for example 12.5 (up to 50%).
3. Name on the bill starts as "Service charge (optional)". The rate is added after it, so the bill reads Service charge (optional) 12.5%.
4. Under Add it to, keep Dine-in (the default) or also pick Takeaway and Delivery. Press Save.
5. To take tips as well, switch on Let customers add a tip and type up to four percentages, such as 10, 12.5 and 15. Customers can also enter their own amount.

What your customers see. At checkout the service charge sits in its own card, marked optional, with a Remove button; a customer who removes it can tap Add back. The tip options show No tip, your percentages and Custom, and No tip stays selected until the customer chooses.

How it's worked out.

• The charge is a percentage of the dishes after money-off discounts. Delivery, packaging and other charges aren't part of it.
• No VAT is added to it for UK stores, matching HMRC's treatment of an optional charge. Tips are never taxed.
• Both show as their own line on the checkout bill, the customer's order page, printed bills, your order screen and WhatsApp order messages, so your records show exactly what was paid.
• If you edit an order's dishes, the service charge is worked out again at its percentage. A tip keeps its amount.

Good to know. Tips and the service charge work on Menuthere's standard checkout. Orders you ring up at the counter on the POS don't add them, so add a charge there by hand. Full details are in the docs: Tips and service charge. Menuthere records the money; sharing it fairly under your tipping policy is still your job.

Take table, collection and delivery orders at 0% commission, with an optional service charge and tips at checkout. Pubs and restaurants: see our. Want your own app as well? See.

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