Revenue in climbdown after mistake over taxing of tips

Revenue & Customs admitted yesterday it had incorrectly taxed tips to waiting staff in restaurants, bars and hotels, a move tax experts claim could save the industry millions of pounds.

Revenue & Customs has cracked down on the industry in a huge investigation known as Operation Gourmet and some businesses have been landed with hefty bills.

One victim was Mon Plaisir, London's oldest French restaurant, which went into liquidation after receiving a £500,000 bill for unpaid tax. The family-run restaurant in Covent Garden is back in business.

The Michelin two-star restaurant, Pied à Terre, is thought to have been fined £187,000 for wrongly administering tips. The Conran Restaurant Group is also believed to have received a huge tax claim.

Tax experts believe the Government, which has investigated tipping systems in hundreds of restaurants, will have to reimburse some businesses after it agreed new changes to the rules on how tips are taxed.

Peter Goodman, at the accountancy firm Wilkins Kennedy, said: "This is a big climbdown for Revenue and Customs and one that the bars and hotels throughout the UK should be cheering. Potentially it could save the hospitality industry millions. Considering all the sound and fury of Operation Gourmet, this is a little embarrassing for Revenue and Customs."

Revenue & Customs previously claimed that where waiting staff shared in a pool of tips run by them, known as a tronc, the employer should pay national insurance on that share of the tips. After legal advice, the Government has said this is an incorrect interpretation of the law. Where the pool of tips is run independently of the employer, the business does not have to pay national insurance (NI).

Businesses that think they have overpaid their NI need to contact Revenue & Customs for a rebate. The Government will be actively offering refunds only to those companies they charged extra NI as part of a compliance visit. A spokesman for Revenue & Customs said: "This affects a tiny number of employers."

Revenue & Customs has withdrawn its guidance notes (E24) on tips and service charges.