Tips and Gratuities

The UK Government has backed a private members bill that will ensure all tips go to workers. The Employment (Allocation of Tips) Bill will make it unlawful for businesses to hold back tips.

NCASS has supported the private members bill via media interviews, the Government Hospitality Council and our work with BEIS to ensure staff tips are distributed to staff fairly. Hospitality workers were some of the worst affected by the pandemic and while tips should not be seen as a replacement for a fair wage, they reward dedication and talent and can be an invaluable top up that keeps great staff in the industry.

Mark Laurie, NCASS Director, commented:

“Both customers and staff have every right to expect that tips go to the staff not to top-up the hospitality businesses’ turnover. The bill has the full support of NCASS and we would be happy to comment on or contribute to efforts to make this law.

“In order to rebuild hospitality, we need to ensure that people are treated with respect, paid fairly and that hard work and great service is rewarded whether hospitality is a career choice or a stepping stone. Ensuring that tips are given to the correct people would show that the government is backing the growth we all want to see in the sector.”

The bill is currently in the Committee Stage. For more information on what the Bill entails, click here.

Government backing of the bill comes following an increase in the number of HMRC investigations into businesses’ handling of tips and gratuities.

Andrew James, Director of James, Stanley & Co. has shared some tips to help employers navigate this.

What is a Service Charge?

A Service Charge is an amount of money added to a customer’s bill that can be discretionary or obligatory.

If the charge is obligatory, then the standard VAT must be applied. If any of that obligatory charge is then passed on to staff as part of their wages, then PAYE and National Insurance (N.I.) must be paid.

If the charge is discretionary, meaning a customer can decide whether or not they want to pay, the standard VAT does not need to be applied.

What is a tip?

A tip is an uncalled for, voluntary, payment made by a customer. It can be a discretionary service charge that is added to the bottom of the bill, but it must be made clear to the customer that this charge is optional.

No VAT is charged on an uncalled for, voluntary payment. If this payment is then made available to the staff who served the customer, then PAYE must be applied. However, the application of N.I. is dependent upon the circumstances in which the tip is given.

When does National Insurance apply?

N.I. applies if the tip is paid, either directly or indirectly, to the staff member, by the employer. This tip cannot represent monies previously paid to the employee. The money must also not be passed from the customer to the employer and then onto the individual staff member. If this does happen, N.I. is applicable.

The employer must not control, either directly or indirectly, who receives a tip or the amount. If a tip is made directly by the customer to the employee and they keep it solely for themselves, then PAYE or N.I. is applied. It is then the staff member’s responsibility, not the employers, to report any tips to HMRC. They can declare it themselves either through a letter to HMRC or by completing a self-assessment tax return.

Tronc Schemes

The payment of N.I. is often negated in the catering sector when a tronc scheme has been set up by the employer, though they can have no direct or indirect influence on the scheme.

A tronc scheme is an organised arrangement to pay out tips, gratuities and service charges. It is the employer’s responsibility to notify the HMRC when the tronc scheme and HMRC will then set up a tronc PAYE scheme. A business can have more than one tronc scheme which may be separated according to different sections/departments (i.e. a separate tronc for Front of House and kitchen staff). All records relating to the tronc scheme, as well as each individual scheme if applicable, must be kept separately from the main business records.

The employer must also inform the HMRC as to who the troncmaster is. This person can be any individual within the business or a third party, though they cannot be the employer themselves, or anyone directly linked to the employer. The troncmaster is the person responsible for the scheme and for making sure that PAYE is properly applied and that any monies are paid to the relevant staff. It is also their responsibility to sort out the relevant tax and ensure that it is paid correctly to HMRC. Failure to handle the scheme properly, may result in the troncmaster becoming liable for any tax under payments or irregularities in the scheme.

The employer must not, directly or indirectly, influence the tronc scheme or the troncmaster as to who should receive a portion of the tip or how much they should get.

When is N.I. applied to a tronc?

If the money within the tronc is from a mandatory service charge, then N.I. is chargeable. Any monies within the tronc that have been collected by the employer and then passed onto the troncmaster would also be subject to N.I. as this would be an example of indirect influence, upon the tronc, from the employer.

Some employers set up a point or service period system, whereby someone who has worked for the business for a period of years may receive a larger percentage of the tips. If this is used as the determining factor on how tips are to be paid, then both PAYE and N.I. are payable. In these circumstances the employer, not the troncmaster, is then responsible for accounting for N.I. in the business pay roll.

Payments received by employees through tips cannot contribute to their pay in order to reach the minimum wage threshold.

If HMRC pay a business a visit and enquire about the tronc scheme, they are likely to enquire:

• When was the scheme set up?
• Who is the troncmaster and are they directly linked to the employer?
• Are they fully aware of their responsibilities?
• Who are the members of the tronc?
• How are the monies paid into the tronc and are any mandatory customer services that are paid into the scheme?
• Is there a tronc bank account and if so, who controls it?
• Who decides the proportion of tips that is paid out to the employees?

You can watch Andrew’s video in full here and stay up to date with industry news here.