If a person charges a service charge to their customers, it is further consideration for the principal supply (e.g. catering services) and follows the same VAT liability as that supply.
If the customer, however, freely gives a tip over and above the total charge, no VAT is due on the tip and it is outside the scope of VAT.
It is important to note that if a customer adds a voluntary tip to their bill, the hotel should clearly distinguish this amount from any mandatory service charges. The voluntary tip amount should not be included in the taxable value of the supply and should not be subject to VAT.
In cases where the hotel distributes the service charge among its staff members, the hotel is not required to account for VAT on the portion that is distributed to the staff as the staff members are responsible for declaring the income for tax purposes.
In conclusion, in the UAE, tips given voluntarily by customers to hotel staff are not subject to VAT, but service charges added to a customer’s bill are subject to VAT. It is important for hotels to differentiate between voluntary tips and mandatory service charges and to comply with the FTA guidelines to avoid any potential tax issues.
Additionally, it is worth noting that hotels in the UAE are required to issue a tax invoice for any taxable supply, which includes service charges subject to VAT. This invoice should clearly show the amount of VAT being charged to the customer.
Moreover, it is the responsibility of the hotel to ensure that their systems and procedures comply with the FTA guidelines regarding VAT on service charges. This includes correctly identifying and accounting for any taxable supplies, providing accurate tax invoices, and properly reporting and remitting VAT to the FTA.
Finally, it is important for hotels to keep themselves updated on any changes to the VAT regulations related to service charges and tips. The FTA regularly issues guidance and updates regarding VAT in the hospitality industry, and it is essential for hotels to stay informed to ensure they are compliant with the law.
In summary, while voluntary tips given to hotel staff are not subject to VAT in the UAE, service charges added to a customer’s bill are subject to VAT at the standard rate of 5%. Hotels are required to properly account for and report any taxable supplies and issue accurate tax invoices to customers. It is essential for hotels to remain aware of any updates to the VAT regulations and to comply with the FTA guidelines to avoid any potential tax issues.