 Tips & Payroll – are you doing it right?
Tips & Payroll – are you doing it right?
Following a three year review on the treatment of tips and cash payments in the hospitality sector (known as “Operation Gourmet”), HMRC issued new guidelines in June 2006 and are now stepping up their PAYE compliance reviews of restaurant and hotel businesses.
Marios Gregori, Tax Director and Anne-Marie Boden, Employment Taxes Manager at PKF suggest that all organisations, which employ staff that are in receipt of tips, should review their existing arrangements to ensure they are compliant under the new guidelines and also to maximise the potential NIC savings by operating a “tronc” scheme.
A brief outline of tips and the PAYE and NIC implications are detailed below.
The basics
It may seem like a very basic question, but what is a tip? A customer may make different types of payment to a restaurant on top of the basic charge for the meal or service, but these may not necessarily be classed as a tip. The payments could be:
- a mandatory service charge
- a discretionary service charge
- a tip paid to the employer as part of a cheque, debit or credit card payment
- a cash payment paid into a staff box or similar arrangement
- a payment in cash left on the table.
HMRC defines a tip as “an uncalled for and spontaneous payment offered by a customer either in cash, as part of a cheque payment, or as a specific gratuity on a credit or debit card transaction”.
Voluntary or mandatory?
A service charge is an amount added to the customer’s bill before it is presented to the customer. If it is pointed out to the customer that the charge is a discretionary amount and the customer is under no obligation to pay it, it is a voluntary service charge. If this is not the case, it is a mandatory charge. Where mandatory charges are passed out to employees, NIC is always due on the payment, irrespective of what arrangements are in place for the sharing out of tips.
If the payment is considered to be truly gratuitous and spontaneous, the tax and NIC treatment then depends on what is done with the money once the customer has left.
Is a tronc in place?
Some tips are paid out to employees by way of a tronc. This is a special arrangement whereby the recipients of the tips nominate one of their fellow employees to be responsible for the sharing out of the tips. This individual is referred to as the ‘troncmaster’.
As long as the employer is in no way involved (directly or indirectly) in the allocation and sharing of the tips, or the paying of the tips, there is no obligation on the employer to operate PAYE or account for NIC. The employer can appoint the troncmaster to look after the share out of tips, but that is really as far as the employer’s involvement should go.
Specific legislation provides that any amount paid to an employee which is a payment of a tip is exempt from NIC if the two following two conditions are met:
- it is not paid, directly or indirectly, to the employees by the employer and does not comprise or represent monies previously paid by customers to the employer
- it is not allocated, directly or indirectly, to the employee by the employer.
Since 2006, HMRC has conceded that the employer can administer a separate PAYE scheme on behalf of a troncmaster if it wishes. HMRC will set up the scheme in the troncmaster’s name but all the paperwork can be carried out by the employer, including:
- issuing separate payslips to the members of the tronc
- deducting PAYE (but not NIC) from the payments
- making tax payments.
In such circumstances HMRC will treat the employer as being a payroll agent for the troncmaster without inferring or implying that the employer is in any way involved in allocating the share of tips due to each employee.
However, the payroll records for the tronc must be kept separately and the troncmaster retains ultimate responsibility for ensuring that the tronc payroll is run correctly: HMRC will pursue the troncmaster for any underpayment of PAYE.
This ‘payroll agent’ approach is sensible as most troncmasters will have little or no knowledge of PAYE or payroll procedures, or indeed the time to operate them and deal with all the necessary paperwork and returns.
National Minimum Wage (NMW) considerations
We must not lose sight of NMW implications when considering tips. NMW is a statutory right and all employees must be paid the NMW by their employer. All tips paid by customers count towards NMW pay if they are paid to the worker via the employer’s payroll and are shown on payslips issued to the workers by the employer.
Tips given directly to the worker, or simply left on the table by the customer do not count towards NMW pay. Money paid out to workers by the troncmaster will count towards NMW where the troncmaster operates PAYE on tronc distributions and uses the employer to pass the net payments to each employee, provided the amounts are paid through the employer’s payroll and reflected on the payslips.
In summary
Remember, if customers simply leave a cash tip on the table or give it directly to the employee in the restaurant, and the employee keeps this tip, PAYE does not apply. With any other arrangement there will be PAYE and NIC implications.
Do not, however, lose sight of the fact that all tips are taxable, it is just that some need to be subjected to PAYE / NIC deduction by the employer at the time they are paid out, whilst others should be declared by the recipient through his or her self assessment tax return and the income tax collected through coding adjustments.
If you think that your business and employees could benefit from a tronc scheme, contact PKF’s employment taxes team for help and advice. Please contact either Marios Gregori or Anne-Marie Boden on 020 7065 0000 or email marios.gregori@uk.pkf.com or anne-marie.boden@uk.pkf.com.
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