Is tronc taxable? NI and tax on tips

Earlier this month, Audit and Business Advisory Partner, Andy Turner featured in Accountancy Daily with the following article:

Tronc versus tips: understanding tax and NI liability

As the festive season gathers pace, the contentious area of tips versus tronc raises some tricky tax and NI compliance issues. Andy Turner, partner at Mercer & Hole, shares his tips on the most frequently asked questions on tronc.

Now we are in the midst of the festive season the hospitality sector is facing its busiest time of the year. Following up on my earlier article, Tips on troncs and tax compliance, I am revisiting the subject of troncs to shed light on this sometimes contentious area.

Troncs can provide both a fair way of rewarding employees with tips and gratuities from customers, and an effective way for businesses to benefit from savings on national insurance contributions (NICs).

Firstly, a quick reminder on the meaning of tronc and its potential benefits. A tronc is a system run by an individual, called a troncmaster, to control the collection and distribution of tips and gratuities.

If a tronc is set up correctly and gratuity payments are made to employees out of tronc, the payment is exempt from NICs. This is a potential saving of around 20%, as long as:

1. it is not paid directly or indirectly to an employee by the employer and does not compromise monies previously paid to the employer; and
2. it is not allocated directly or indirectly to the employee by the employer.

However, if tips are paid to the employer, the subsequent payments from the employer to the employee can still be ‘in respect of a tip’.

If payments are in respect of a tip, no NICs are payable as long as the employer is not involved in the allocation of such tips.

The top 10 most frequently asked questions about troncs

1 If we add a fixed service charge to the bill, can this be distributed as part of the tronc?

A tronc can be used to distribute service charges but they must be voluntary. It must be made clear to the customer that the charge is purely discretionary and there is no obligation to pay.

This should be reflected on the bill presented to the customers and it must be consistent with advice given to customers by the entity’s employees. HMRC will accept that a payment is a voluntary service charge if it is clearly presented to the customer as an optional payment.

2 Are tips outside the scope of VAT?

Tips are outside the scope of VAT if they are genuinely freely given. If it is a compulsory service charge this is part of the consideration for the underlying supply of the meal and is therefore standard rated. If customers have a genuine option as to whether or not to pay the service charge it is accepted this is not a consideration for the supply of the meal and therefore outside the scope of VAT.

3 Are tips outside the scope of income tax?

If customers give cash tips directly to employees or leave them on the table and individual employees keep them, it is the responsibility of the individual employee to advise HMRC of the amounts of money received. The tax is then usually recovered by an adjustment to an individual’s tax code.

If tips are paid through the employer or via a tronc, tax is recovered via a PAYE system. This is either operated by the troncmaster or the employer depending on the circumstances.

4 As an owner, can I influence how the tips are paid to employees?

In order to be exempt from national insurance, the employer cannot determine, directly or indirectly, the allocation of the tips. The allocation should be left to the troncmaster (who could be the head waiter, for example).

5 Can I operate a points or other value based system to determine the allocation of the tips?

If the points system for allocating the tips is devised by the employer then the employer is indirectly involved in the allocation of the tips, and the tips will not be exempt for NICs.

6 I want to retain some of the tips in the business, can I do this?

The employer may affect the overall amount available for allocation, but as long as they are not directly or indirectly allocating the tips any amounts distributed are exempt from NICs.

7 Can I use the tronc to pay contractual payments?

Any payments you are legally obliged to make to employees cannot be payment ‘of a gratuity’. Contractual payments will include any payments that form part of an employee’s terms and conditions of employment or any payment that is promised, guaranteed or underwritten by the employer even if paid by a third party.

However, a contract of employment can include a right to participate in tronc arrangements indicating to employees that they will receive a share of the potential tips. There may be a right to participate in the tronc, but if there is no right to receive any tronc payments, tips paid from the tronc will not attract NIC as long as the employer is not involved in the allocation of the tips.

8 Can I agree that each employee will receive a minimum amount from the tronc?

This is a potential problem as the employer is establishing a legal obligation to make contractual payments. Any top-up payments to achieve the promised amounts cannot therefore be a tip and NICs are due.

The payments in the contracts will also attract NIC if the employer directly or indirectly allocates these payments, which is likely to be the case in setting specific minimums in individual contracts, and therefore they will not be exempt from NICs.

However, if payments are made in excess of the minimum and the employer does not directly or indirectly allocate the payments, no NICs will be due on amounts paid in excess of the minimum.

9 Can I influence who can participate in the tronc?

An employer can influence who can participate in a tronc but they cannot determine how much each person is allocated from the tronc.

10 Can I use a tronc to count towards paying the national minimum wage (NMW)?

Since 1 October 2009 any amounts paid by an employer to the worker which represents tips, gratuities and service charges do not count towards the national minimum wage (NMW) pay.

About the author

Andy Turner FCA is an audit and business advisory partner at Mercer & Hole. He has many years of experience in the hospitality sector and counts The Ritz Paris and The Savoy among the many clients he has advised.