There is the potential for much confusion about the nature and accounting treatment of these items.
Here are some pointers and indicators to help to understand the issues and to interpret hotel data where they apply. The term hotels includes rooms, restaurants, bars and related services. There is no one UK standard that governs the accounting for tips and service charges. The views expressed here are those of the author and the treatment of these items for hotel operating statements as set out in the 11th Revised Edition of the Uniform System of Accounts for the Lodging Industry (USALI).
Distinguishing between tips and service charges.
Tips, or gratuities, are amounts paid by customers to employees either in cash handed to or left on the table for them. Alternatively, they are amounts voluntarily added to bills, credit card charge slips, cheques paid, or via POS terminals by the customer. In all cases, the customer decides whether or not to apply a tip and how much it should be.
Service charges are amounts added by hotels to bills. The hotel has made the decision to add a service charge - the existence of which and the applicable amount being stated on tariffs, menus and bar lists, and shown on the bills as part of the total payable when it is presented to the customer.
The distinction between these is not always accepted or understood but is considered to be a good place to start for this article.
Where 'suggested' tips are indicated on bills presented by hotels - or service charges are described as ‘discretionary' - introduces further potential for confusion. The important effects of these variations are covered later.
To whom do tips and service charges belong.
It is generally accepted that tips that fit within the definition above belong to the staff, and the hotel may be involved in collecting them on behalf of the employees.
A European court decision established that service charges and tips other than those paid in cash, belong to the business. Any distribution to staff is a matter between employer and the employees.
Other considerations affecting how tips and service charges
1 Discretionary payments
Tips, as defined above are always discretionary.
Service charges in the UK are generally stated to be discretionary. The fact that there is a charge, at what level, and what happens to it, are all decided by the hotel - and the amount charged is part of the bill presented to the customer. So it is only whether or not to pay the service charge that is left to the customer’s discretion.
The importance of discretionary payments is that they are not subject to VAT. Even though a service charge or tip, often as a percentage, may be added to a bill total that includes charges that are subject to VAT, the tip or service charge amount is free of VAT.
2 Distribution systems affecting accounting
There is no law determining whether or how tips and service charges are distributed.
Common practice is that tips are either retained by the individuals receiving them or pooled and shared by the staff. It is between the employer and the employees as to whether service charges are partly or fully distributed.
Providing the staff concerned control and decide on the allocation of the tips or service charge, it is possible for a formalised system known as a tronc to be established that enables exemption from both employer and employee National Insurance. If the employer is involved, then National Insurance becomes payable by both. In all cases, income tax is payable.
VAT and National Insurance costs materially affect the customer, the employee and the employer and have greatly influenced the variations in practice that are found in UK hotels. Where advantage of the rules has been taken, ensuring compliance withe relevant requirements is an important consideration.
3 Accounting considerations
It is generally accepted that tips are not reflected in a hotel’s operating statements. The collection and distribution of tips is treated through the balance sheet. Most arrangements for tips are that they are paid out as received or credited, so that if there is a delay between receipt and payment, a minimal balance will be carried forward that clears in the next accounting period.
Service charge treatment may vary depending on the policy adopted by the hotel as to whether or not there is a part or full distribution - and if any part of the service charge is retained how it is accounted for.
The USALI latest edition in the section on Gross versus Net Reporting attempts to regularise the accounting treatment for service charge income recognising for the first time that it can apply in every department of the hotel.
It refers to mandatory, non-discretionary or automatic charges in respect of a service or use of an amenity and adds a qualification that the client does not have the ability to alter the amount or direct where the payment of the service charge should be made. It goes on to say the hotel is considered to:
• be the primary obligor
• establish the price
• determine the product or service specification
• retain the general credit risk
And in such circumstances the service charge should be recorded as revenue and may not be credited to any expense account.
Interpretation and implementation of the latest USALI standard is not universal, and accounting practices vary considerably in the UK and internationally.
It is important to note that inclusion of service charge in the revenue may conflict with how revenues are defined for the purposes of management contracts, franchise and lease agreements. This does not mean that sound accounting principles should be overlooked, but making material changes may mean agreeing the intentions of the parties to these agreements.
Note also that as hotel service charges are generally applied to bill totals that are VAT inclusive, and so long as they are clearly labelled as discretionary, the amounts concerned may range from 6 percent of rooms revenue (if applied as 5 percent of the total) to 12 to 18 percent of restaurant, bar and other departmental revenue (if applied at 10 to 15 percent of the bill totals). It must make sense that these revenues are included in the operating statements, together with amounts distributed to staff being shown as part of the labour costs.
Care should therefore be taken to establish exactly how a hotel handles tips and service charges and where in their accounting and reporting these items have been allocated.
To address the whole subject of issues relating to tips and service charges, how they are seen by the public, the employees, the tax treatments - and how they are handled and accounted for by hotels would take another book. References to sources of further details follow.
http://tinyurl.com/hcyzpb9 Tip of the Iceberg
http://tinyurl.com/z928hu9 The Iceberg is Coming
http://tinyurl.com/jrz8s7z BIS Consultation Document
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