VAT on Tips vs Service Charge in the UAE: Owner Guide

Summary

Voluntary tips freely given by guests over and above the bill total are outside the scope of VAT (not VAT-able).
Service charges added to the bill (e.g., 10%) are part of the consideration for the meal/service and follow the same VAT liability as the principal supply (usually 5%).
To stay compliant: label tips as optional, do not include them in the VAT base, and keep service charges within the taxable amount.
Sample invoice formats below show the correct way to display service charge and optional tips on a bill.

VAT on tips and service charge in the UAE

Hospitality teams increasingly rely on digital and QR-based tipping. This guide clarifies the VAT rules that apply to voluntary tips versus mandatory (or auto-added) service charges, and shows how to format invoices correctly so that VAT is calculated only where required.

The rule at a glance

Service charge on the bill: VAT applies. Treat it as part of the consideration and tax it the same as the main supply (e.g., the meal).
Voluntary tip from the guest: No VAT, provided the guest freely gives the amount on top of the total charge (e.g., cash, QR tip, or an optional add-on the guest can skip/change).

Source: FTA Taxable Person Guide, section “Service charges and tips”: if a person charges a service charge, it follows the principal supply; where a customer freely gives a tip over and above the total charge, no VAT is due. (VATG001, s.5.5)

Decision flow: tip vs service charge VAT in the UAE

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Decision checklist

Is there an amount auto-added to the bill? Yes → it is a service charge → include in VAT base.
Is the amount clearly optional and guest‑set? Yes → it is a voluntary tip → do not include in VAT base.
Is the amount embedded in menu prices? Treat the whole price as consideration (VAT applies); avoid double‑counting if you also add a separate “service charge” line.

Invoice formatting: correct vs incorrect

Correct – service charge VAT-able; tip outside scope

Restaurant LLC (TRN 100012345600003)
TAX INVOICE  #INV-231045
Date: 2025-08-26

Food & Beverage (excl. VAT)     200.00
Service charge (10%)              20.00
----------------------------------------
VAT base                          220.00
VAT @5%                           11.00
TOTAL (incl. VAT)                231.00

Gratuity (optional, outside VAT)  10.00  ← Do not include in VAT base
Amount paid                      241.00

Show tips as optional and outside VAT. Ensure the VAT base includes the service charge. Prices shown to consumers should be VAT-inclusive.

Incorrect – tip folded into VAT base

Food & Beverage (excl. VAT)     200.00
Service charge (10%)              20.00
Tip (guest left)                  10.00   ✗ wrongly added to VAT base
VAT base                          230.00  ✗ should be 220.00
VAT @5%                           11.50   ✗ overcharged

A voluntary tip should not increase the VAT base or the VAT amount.

POS & QR setups that keep you compliant

Separate the tip screen from the tax calculation: Present the tip selector after you’ve computed taxable amount and VAT—store the tip as a non‑tax line.
Label clearly: Use wording like “Gratuity (optional, outside VAT)” on receipts and digital confirmations.
Staff pooling vs direct‑to‑staff: The VAT status does not change—if it’s freely given by the guest, it remains outside scope even if you later pool and distribute it.

Accounting entries (illustrative)

// Customer leaves AED 10 optional tip via QR
Dr Cash/Bank                           10.00
Cr Tips Payable (liability to staff)   10.00   // outside scope of VAT

// Customer pays AED 231 incl. VAT for F&B + service charge
Dr Cash/Bank                          231.00
Cr Revenue                            220.00
Cr VAT Output Payable                  11.00

Frequently asked

Can a service charge be “optional” and still be VAT-able?

If the amount is not auto‑added and the guest freely chooses it, treat it as a voluntary tip (outside scope). Once it is added to the bill total as a charge by the business, it becomes consideration and VAT applies.

Do I need a tax invoice for tips?

No. Supplies outside the scope of VAT are not taxable supplies and do not require a tax invoice; you may still show an acknowledgement on the receipt.

What must every tax invoice show?

Include “Tax Invoice”, your TRN, invoice date, VAT amount, and prices displayed inclusive of VAT for consumers. See checklist below.

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Quick checklist for invoices

Display the title “Tax Invoice” and your TRN.
Show VAT amount and total payable; prices shown to customers should be VAT‑inclusive.
Keep voluntary tips outside the VAT base; label as optional.

Sources

Federal Tax Authority – Taxable Person Guide (VATG001), s.5.5 “Service charges and tips”. tax.gov.ae
FTA – Tax Invoice Checklist (infographic): VAT shown; prices to consumers VAT‑inclusive. tax.gov.ae
FTA – VAT Returns User Guide (noting outside‑scope items are not taxable supplies and do not require a tax invoice). tax.gov.ae