Tips, service charges and troncs – the new year ahead
We explore how to support staff with the cost of living; whilst preparing for changes in legislation.
Supporting staff with the cost of living.
It doesn’t matter whether it be a bar, restaurant, or hotel, operators in the leisure sector need to deal with complex tax and National Insurance rules in relation to service charges and tips left by customers. HMRC will typically attempt to recover any underpaid tax and NIC from the employer so, even if there is a tronc arrangement in place, the employer needs to ensure that this is operating compliantly. This article considers the current payroll treatment of tips and service charges as well as the impact of the planned Employment (Allocation of Tips) Bill that we expect to see enacted (no exact timeframe has been proposed).
How are tips and service charges taxed?
Tips are taxable, but how the income tax is reported and paid, and whether NICs are due, depends on who makes the payment to the employee and how the tips are managed/allocated.
Where employees are permitted to receive and retain tips directly from the customer (e.g. a cash tip left at a restaurant table), the employee must pay the associated income tax through self-assessment and no NIC is due. Therefore, in these circumstances (i.e. there are no organised pooling or distribution arrangements), there are no payroll obligations for the employer.
In contrast, where the employer allocates tips to employees (e.g. by aggregating discretionary services charges added to bills and distributing them in line with the employer’s policy on tips), both PAYE and NIC (employee and employer) are due. Tips and voluntary service charges allocated through a tronc are the responsibility of the troncmaster not the employer and we explain below how a tronc operates.
What’s a tronc?
A tronc is an organised arrangement for collating and distributing tips and discretionary service charges commonly found within leisure venues. The tronc is funded from service charges (which must be presented as discretionary), credit card tips and, less commonly, cash tips.
The arrangement is controlled by a troncmaster, who is responsible for deciding how tronc monies are allocated to participants. The troncmaster must be independent from the leadership/ownership of the business. This means that the troncmaster cannot be a director, owner, partner, senior manager etc.
Typically, the troncmaster is the General Manager of a site who’s responsible for independently allocating the tips and service charges in the tronc. Whilst the employer can appoint, replace or remove the troncmaster, they cannot support the troncmaster to allocate the tronc funds. The funds may be held in the employer’s business accounts but identified separately and not available for the business’s use. However, it is acceptable for the employer’s payroll to be used to operate PAYE, provided that the allocation instructions come from the troncmaster.
Although monies paid from a tronc are taxable under PAYE, they are not subject to NIC. Given the NIC savings opportunity, it is unsurprising that tronc arrangements come under scrutiny from HMRC in the event of a review.
Employers who operate tronc arrangements should therefore confirm that the processes and controls in relation to the arrangements are appropriately structured to properly benefit from NIC free treatment as, if not, the potential exposure to underpaid NIC as well as the effect on other liabilities such as Student Loans, Apprenticeship Levy, Pension etc. could be significant.
Planned changes to Tips
The Employment (Allocation of Tips) Bill was introduced on 15 June 2022 and will enter its House of Commons report stage on 20 January 2023. Our expectation is that the Bill will become law in England & Wales and Scotland within the next 18 to 24 months.
After many previous debates on this subject, and the publication of a non-binding Code of Best Practice on tips, the Bill proposes to give clarity and direction on how tips should be dealt with. In its current form the Bill proposes that:
- All tips must be passed to employees in a fair and transparent manner;
- All tips must be allocated/distributed by the end of the month following the month they were collected;
- The business will not be permitted to retain any amounts from the tips collected, even if only to cover its genuine costs in passing them to the employees (e.g., credit card charges and payroll costs);
- The system or arrangements in place, should be fully documented and shared with all participants;
- Employers will have an obligation to provide (if requested) a record of tips received by any employee over a rolling three-year period;
- Agency workers are to be entitled to tips in the same way as employees;
- A refreshed Statutory Code of Practice will be implemented which recognises the relevance and importance of running compliant and efficient tronc arrangements (though this is not proposed to carry any mandatory commitments); and
- Employees who receive tips will have a right to take any disputes to the Employment Tribunal.
In terms of timing, whilst there is no planned date from which the Bill will become law, we do anticipate that employers will be given twelve months’ notice to adapt as necessary.
What should operators be thinking about now?
Points to consider include:
- Do you have a tips policy that is fair and transparent?;
- Does it cover all staff including back and front of house, agency staff etc.?;
- Are employees and customers aware of your tips policy?;
- Do you operate a tronc and, if so, are you satisfied that it is set up correctly?;
- Are there any retentions from tips being distributed to the tronc or directly to employees?;
- If you are not already operating a tronc, do you know what the NIC savings might be for employees and how you can make this work to support with cost of living increases?;
- Have you checked that other company documentation and policies do not inadvertently undermine the compliance and efficiency of a tronc arrangement (for example, references to tronc and entitlement/amounts mentioned in job adverts, contracts, offer letters, other T&Cs or Policies)?;
- How are you managing tax and, where relevant, NIC compliance in relation to cash tips?; and
- Have you considered changes (and the associated financial costs) that would be required within your business, should the new Employment (Allocation of Tips) Bill become law?
How can KPMG help?
At KPMG in the UK we have extensive experience, credentials and expertise to work with businesses to provide a range of services to assist with implementing new, or reviewing existing, tronc arrangements.
Please contact the author, or your usual KPMG in the UK contact, if you wish to talk through the points set out in this article.