Sure, as per the tax guidelines, tips are not tax free. I'm well aware of this. But business owners that may ask their customers for tips most definitely see this as a way to bargain with would-be employees that their miserably low wage will not be that bad as it's just a supplement to the mad stacks you will be making from tips. And they are not on the hook to pay this tax, the employees are. And if the tip is paid in cash, at least here in the UK, it's very hard for the tax authorities to actually determine that you are not paying the tax you should be paying. The materiality for anyone above the income tax threshold is way above what a normal tip would be and nobody's going to do multiple sting operations to test if a waiter is actually not paying tax.

I believe there are employer side taxes in both the US and UK, right? Even if tips would be reported and taxed as income buy the worker, they would still be cheaper because the customer paid no tax.