UK restaurant service charges hit 15%

Now, some restaurants are putting a cover charge on top of the service charge. PHOTO: UNSPLASH

LONDON – We’ve all been there: Dinner is over, and the bill arrives. It is notably higher than expected, and not just because of the ubiquitous cost-of-living increase. On the bottom of the bill is the reason: an additional charge, generally 12.5 per cent, that has been added on for service.

Ten years ago, service charges were a rare occurrence. The rule of thumb was that operators would leave tipping up to customers, who would shell out roughly 10 per cent of the cost of their meal if service had been particularly good. A 15 per cent tip would have been considered generous. That is the model that is invariably followed in the United States, though a debate about whether to tip 25 per cent for a bottle of water is currently raging.

While service charges are not common in most parts of Britain, the additional dining fee at London restaurants has become increasingly familiar.

Now, some restaurants are putting a cover charge on top of the service charge. At the buzzy Delaunay in Covent Garden, the service charge sits at 15 per cent – and there is also a £2 (S$3.20) cover charge, per guest. At the Ivy – the original one in London’s West End – a “discretionary optional” 13.5 per cent is added for service, again with an additional £2 cover.

Fees like that have diners asking questions, including “what is service charge?” and “is it truly optional?” Bloomberg has some answers.

What is a restaurant service charge?

A service charge is a payment put on the bill at the end of a meal by a restaurant that is almost always a percentage of the meal’s cost. It is usually optional, but sometimes mandatory, especially for larger parties or for patron who have dined in a private room.

The rules in Britain differ from those in other parts of the world. Since 2009, the government has mandated that service charges and tips in Britain be provided on top of minimum wage paid by the employer rather than be used to push wages up to the minimum amount.

However, whether all the service charge goes to employees is a grey area. The money can be directed in multiple ways: It can be paid directly to servers; it can be split among all the wait and kitchen staff; or it might be retained partly or entirely by the restaurant.

According to a 2021 British government report, research showed that many businesses “that add a discretionary service charge onto customer’s bills are keeping part or all of these service charges, instead of passing them onto staff”. While cash tips were more likely to be passed onto employees, 80 per cent of gratuities is now made on a credit card, according to the government. To tackle the problem, the government announced plans to introduce legislation that would force businesses to hand over the entirety of tips to staff, which could help two million workers financially if it were enacted.

Do you have to pay a service charge?

There are two types of service charges: discretionary and mandatory. The former is when it is “made clear to the customer” that you do not need to pay the charge, according to HM Revenue and Customs (HMRC). Commonly, this is done by restaurants using the words “discretionary” or “optional” on the bill or menu. Diners can request to have the charge removed from the bill, however awkward that might feel. If it is a mandatory charge, then the customer must be told about it in advance, though the manner of telling them is not clear. According to the consumer protection organisation Which?, customers can quibble about compulsory charges if the service was “particularly poor”.

“If you don’t get an acceptable level of service, the restaurant could be in breach of contract. Under the Consumer Rights Act it is legally required to use reasonable care and skill when providing its service,” according to Which?. However, diners must be reasonable: Do not expect silver service in a fast-food restaurant.

What’s the difference between a service charge and a tip?

According to HMRC, a service charge is different from a tip or gratuity, which is “an uncalled for and spontaneous payment offered by a customer” that can be paid by credit card, with cash or cheque, or by using a digital payment.

In other words, a service charge is a percentage amount that automatically appears on the bill. Tips are not specified on the bill, and the amount is decided on by the diner.

Tips can also be more specifically steered to servers and waitstaff if they are left in cash. The dispersal of a service charge is invariably decided on by the restaurant.

What is a cover charge in a restaurant for?

A cover charge is a fixed fee charged per person that goes to the restaurant. It is ostensibly to cover the standard costs of serving diners, including bread for the table, snacks like nuts or olives, water and even washing tablecloths and napkins.

While it is not standard for restaurants to add a cover charge, several do. Besides the Delaunay, other London restaurants including Fischer’s, the Wolseley, Cod d’Argent and Sartoria have one on their menus, ranging from £1.75 to £2 per diner.

Is a service charge tax-free?

It depends. Mandatory charges are subject to VAT, but optional ones are not. Discretionary service charges or tips are subject to income tax and might be subject to National Insurance, too, depending on the conditions in which they were paid.

Why isn’t a service charge folded into the price of dishes?

It is difficult to give a blanket explanation as to different restaurants’ policies. But one reason service is not included, besides the optics of higher menu prices, might be overall cost. A discretionary service charge is technically voluntary, so it is not subject to VAT. However, if the charges were added through increased menu prices, a 20 per cent VAT would be charged to the customer. For example: If you spent £100 on a meal and were charged a 10 per cent discretionary service charge, the total would be £110. But if the £10 service charge had instead been paid for through higher food prices on the menu, the meal would cost £112 because of the 20 per cent VAT added onto the additional £10 menu cost. BLOOMBERG

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