Restaurants claim victory over tax on tips

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The restaurant industry claims it has won a multimillion-pound victory against the Inland Revenue over tax demands on tips.

Tax experts believe the Revenue, which has been investigating tipping systems in more than 400 restaurants, will have to reimburse some businesses and drop claims amounting to more than £20m after it agreed to changes in its guidelines as to how tips are taxed.

After negotiations with PricewaterhouseCoopers (PwC) and the British Hospitality Association (BHA), the Revenue has clarified its rules on tips left by customers that are distributed to staff. Restaurant owners can now, for example, deduct credit card transaction charges from the pooled tips and still escape paying national insurance. Previously they would have had to pay national insurance.

The new guidelines on the way tipping is to be taxed will be published today.

The Revenue launched a crackdown, known as Operation Gourmet, on the industry 18 months ago, and some businesses have been landed with hefty bills.

The Conran Restaurant Group, for example, is understood to have an outstanding claim against it of more than £1m. One victim was Mon Plaisir, London's oldest French restaurant, which went into liquidation after receiving a £500,000 bill for unpaid tax.

John Whiting, of PwC, said: "The Revenue has now agreed that exemption from national insurance isn't lost in a number of cases, including if management keeps some of the money to cover costs. The changes will allow a number of businesses to reclaim tax that has been wrongly charged. Tens of millions of pounds are at stake in unsettled claims."

Bob Cotton, of the BHA, said the changes would make a significant difference to waiting staff pay packets, as well as business profits. "These are very complex rules, but staff are paying tax on their tips when they shouldn't have to." he said.

Alain Lhermitte, who owns the family-run Mon Plaisir, which is back in business, said yesterday he would not try to resettle with the Revenue.

"I didn't do anything wrong. My son ran our system, which the Revenue said was unacceptable," he said. "But this is a family-run business. Who else was going to do it? I won't be taking on the Revenue again."

A spokesman for the Revenue said the changes were minor. "They are likely to affect only a small number of cases. We believe the changes are unlikely to eliminate national insurance liability for many cases," he said.