UK Restaurant Service Charge & Tips Guide (2026): Discretionary vs Mandatory, Tronc, VAT

In UK hospitality, “service charge” often looks simple on the bill and complicated in operations. The core risk is classification: discretionary and mandatory charges behave differently for VAT and payroll handling, even when percentages look identical.

This guide is built for owners and operators who want clean setup across menu copy, POS, and payroll.

Quick Summary

• Discretionary and mandatory service charges are different categories in practice.
• Mandatory service charges are generally VATable under HMRC treatment.
• Discretionary charges can fall outside VAT where customer choice is real.
• Since 1 October 2024, employers must pass tips/service charges to workers fairly under UK tipping law.
• One written policy plus one repeatable audit loop prevents most disputes.

Why This Matters in 2026 Operations

As wage and occupancy pressure persists, more venues use service-charge policies to stabilise labor coverage. The policy itself is not the problem; inconsistent application is. Most failures come from mismatched wording across menu, receipt, and staff explanation.

UK Rule Baseline

1) HMRC: VAT treatment depends on whether charge is compulsory

HMRC VAT guidance distinguishes compulsory and discretionary treatment. If the charge is compulsory, it is generally treated as consideration for the supply and VAT applies. If genuinely discretionary, it is typically outside VAT scope.

2) HMRC/Payroll: tips and troncs

HMRC guidance on tips, gratuities, service charges and troncs explains that payroll/NIC outcomes depend on control and payment route. If you run a tronc, define roles and governance clearly before distribution begins.

3) UK tipping law since 1 October 2024

The Employment (Allocation of Tips) Act 2023 framework and statutory Code of Practice require fair allocation, policy clarity, and recordkeeping. This is now an operational requirement, not just a culture choice.

Pricing Math: Discretionary vs Mandatory

Use VAT-aware comparison before final menu decisions.

Assumptions:

• Menu gross price: GBP 16.00
• Service charge rate: 12.5%
• VAT rate example: 20%

Discretionary model:

serviceCharge = 16.00 x 0.125 = 2.00
guestTotal = 18.00
VAT base remains menu price treatment (discretionary charge outside VAT scope)

Mandatory model:

serviceCharge = 16.00 x 0.125 = 2.00
guestTotal = 18.00
VAT applies to compulsory total consideration

Same guest total can produce different tax handling. Run accounting mapping before publishing policy.

Local Execution: Central London vs Greater Manchester Suburban

Menu and Receipt Wording

Discretionary example:

“A discretionary service charge may be added. Please tell us if you would like it removed.”

Mandatory example:

“A service charge is added to all bills and distributed to staff under our written policy.”

Never mix discretionary label with compulsory behavior.

20-Minute Weekly Compliance Loop

1. Sample 20 receipts and verify label matches actual charge behavior.
2. Confirm VAT mapping for compulsory line items.
3. Spot-check tronc or payroll allocation records.
4. Review one complaint or refund case to improve wording.

Related Guides

• UK Restaurant Menu Pricing Guide
• UK Menu Price Review Checklist
• UK Restaurant VAT Pricing Guide
• UK Restaurant Labour Cost Calculator
• UK Restaurant Prime Cost Calculator

KitchenCost helps operators keep menu math, VAT handling, and labor targets aligned in one place.

Sources (checked on 2026-02-13)

• HMRC VAT Manual - Service charges (VATSC06130)
• HMRC Employment Income Manual - Tips, gratuities, service charges and troncs (EIM02300)
• HMRC PAYE Manual - PAYE on tips and service charges (PAYE73030)
• GOV.UK - Employment (Allocation of Tips) Act 2023
• Department for Business and Trade - Statutory Code of Practice on fair and transparent distribution of tips