Humanity has been very particular about giving things names. Some cultures are more particular than others. The precision of the German language and the pinpoint accuracy of Latin as used by academics are on the assiduous extreme.
When it comes to tax, this is where you want to be. It is bad enough that a treatment may veer one way or the other, but when slight variations increase the amount of potential dimensions involved, frustration can quickly set in.
In a previous article, I discussed what turnover constitutes taxable revenue, where the boundaries of de minimis revenue can tilt whether corporate tax applies or not, and the warning signs that you might be crossing a boundary that you wish to avoid.
Today, we are going to delve into something altogether more innocuous. It is often the throwaway action, even when it is one of kindness, that can leave someone else unstuck.
Let us say we sit and have a Dh20 ($5.45) cappuccino in a hotel reception area.
Service being excellent, we add a Dh5 tip.
Does this constitute revenue for the hotel? It depends.
Let us build up the case from a VAT perspective and let that lead us in coming to a position on what the corporate tax position might be.
This hotel does not levy a service charge, any additional payment made is at the discretion of the guest and the monies are received in full by the individual serving. I would suggest that this is a gift. No VAT would be applied as it is not directly related to a service, and it follows that it would not be revenue.
What if all the servers pool their tips, ensuring that back of house staff get something for ensuring the experience is a good one? Again, if the hotel is not formally involved, I would argue the same treatment applies.
Should the hotel formally levy a service fee, what changes?
Now, there is compulsion. I have to hand over additional monies at the advertised rate. Surely it bundles into the total cost of my coffee and VAT must be levied on that. If VAT is levied, reported and remitted to the Federal Tax Authority, it is because it forms part of the hotel’s revenue.
Say the hotel is a good actor and passes these amounts, without the VAT, to its personnel. You might expect the monies received and paid to cancel each other out on the staff cost line of their profit and loss statement.
Is this now revenue for corporate tax purposes? I suggest it is. However, by paying it in full to staff, there would be no tax to pay on it. Should the hotel take a share of the total, then that element would be taxable.
Finally, there is the additional work required in the preparation of accounts for end of fiscal year. My gratuity might form part of their staff costs line, but it will likely need to be stripped out and added to the revenue line.
It may seem overly complex for something so simple, and it’s about to get a lot more so.
Imagine a scenario in which there is no service fee mandated, however the payment process blatantly suggests that you might want to add a tip. Does this constitute compulsion?
One can argue this either way. On one hand, a formally presented hotel document has included a written request that you might consider leaving additional monies in lieu of the experience that you have had and will be paying for.
While you have the option not to take up their offer to reward their staff, many might find it embarrassing not to. Especially when faced by a standing, friendly and – for all of us who have done this type of work sometime in our lives – hopeful person. So, VAT the amount and report it for corporate tax.
On the other hand, it is optional, no more so than deciding to leave a note in the payment case or under your saucer.
These discussions we have here every fortnight are important. We take a journey through the minutiae, because the devil is very often in the detail. We are training our minds not to accept what we first perceive something to be. We need to be certain as – like I said in the opening paragraph – lexicographers with a German or academic attention to accuracy.
Yes, time has a cost. However, penalties in the form of hard cash paid to regulatory authorities just grate more than losing an hour of your working day.
David Daly is a partner at the Gulf Tax Accounting Group in the UAE
