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Tips These are amounts that customers pay voluntarily in addition to the price charged for the service provided to them.
VAT
VAT is levied on the remuneration: all amounts charged by the trader in respect of the service. If a higher amount is paid, the remuneration shall be equal to the amount paid.
The tip received by a business owner is therefore also part of the remuneration on which VAT must be paid.
If the customer pays the tip directly to the employee(s) (in cash), no VAT is payable on the tip, except where the employee receives the tip:
- pursuant to a third-party clause (the Supreme Court[1] confirms that, in the case of tips paid voluntarily by customers directly to employees, there is no question of acquisition under a third-party clause);
- in the name and on behalf of the business owner (if the tips can be used by the employees for their own benefit, they are not received in the name and on behalf of the employer).
Partly on the basis of this ruling, the following has been approved[2] that no VAT is payable on tips which employees have agreed, by mutual consent, to share out in a specific proportion, and in which the business owner may also share. The business owner must demonstrate through their records the extent to which tips have been received. In practice, this is usually done via a tip jar.
Debit/credit card
If the customer pays the tip by debit or credit card, it is, of course, the business owner – not the employee – who receives the tip.
Approved2 is that the tip also remains outside the scope of VAT-chargeable remuneration, insofar as those amounts have been passed on by the business owner to the employee(s). In practice, this is done, for example, by removing tips received via debit or credit card from the till and placing them in the employee(s)’ tip jar.
Services provided by the business owner
Entrepreneurs who receive tips for the services they provide (such as “self-employed drivers” in the taxi industry) are, subject to approval2, are not liable for VAT on their tips if:
- operates in sectors where fixed prices are applied and;
- where it is customary to receive tips and;
- The records can be used to demonstrate the extent to which tips have been received.
This approval relates in particular to the hospitality and taxi sectors.
Payroll deductions
Wages comprise everything received in connection with the employment, including anything reimbursed or provided in the course of the employment.
The employer must deduct payroll tax on all benefits that by or with the knowledge of provided to the employee by the employer in the course of their employment.
For the purposes of income tax, tips are not included in the employee’s wages insofar as the wages applicable to the employee were determined without taking into account tips received from third parties[3]. If no agreements have been made regarding tips, tips received are not subject to payroll tax, but are taxed solely as income tax (the employee must then include them in their income tax return).
An employee who works in a business that carries out hospitality activities[4] Notwithstanding the foregoing, a person carrying out such work shall be deemed to have received tips if the wages received from the employer are not at least equal to the wages applicable under the law or the collective labour agreement.
Employer’s involvement
If the employer (jointly) determines how the tips (or tip pot) are used, the tips are subject to both VAT and income tax and social security contributions.
This is the case, for example, when the employer organises a staff outing and the costs are paid from the tips (pot). The fact that the employer is organising the outing may be evident, for example, from the fact that the quotation or order confirmation is in the employer’s name, or that the employer makes the payment.
A contribution from the employer towards a social outing organised by the employees is not a problem. This contribution from the employer is, of course, considered pay (and may, if desired, be included in the flat-rate work-related expenses allowance).
It is best to leave the distribution of the tips (tip jar) entirely to the staff.
Employment law
The Supreme Court has confirmed that an employer is entitled to pay a wage lower than that to which the employee is entitled by law or under the applicable collective agreement[5]. This is subject to the condition that the employer can assume that the employee receives tips amounting to a certain sum.
Minimum wage and holiday pay
Tips are taken into account when determining whether the obligation to pay (at least) the minimum wage has been met, provided that the tips were taken into account when the terms and conditions of employment were established. If an employee receives insufficient tips during a pay period, the employer must ensure that that employee does receive the minimum wage.
A collective agreement usually does not allow for tips received by the employee to be taken into account when determining whether (at least) the minimum wage under that collective agreement has been met. Naturally, the text of the relevant collective agreement must be consulted for this.
The employer is also required to pay holiday pay (at least 8%) on the amount of tips taken into account when calculating the wages to be paid by the employer.
The purpose of this note is to outline a scheme. For the sake of readability, matters have therefore been simplified. VWG is therefore not liable for the consequences of actions taken or not taken as a result of this memorandum.
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[1] Supreme Court, 23 November 1994, No. 29.186 (concerning taxi drivers).
[2] Decision of 29 December 1994, No. VB94/4707 (Notice 32).
[3] Article 3.6(1) of the 2011 Income Tax (Implementation) Regulations (based on Article 12 of the 1964 Income Tax Act).
[4] In a company that includes hospitality operations, this rule applies only to staff working in that division.
[5] Supreme Court, 2 March 2001, No. C99/180HR; ECLI:NL:HR:2001:AB1254 (Hotel New York)