The hospitality industry, gratuities, and your liabilities
Businesses in the catering and service industries where tips are common need to be aware of the tax rules relating to tips and service charges. The rules are complex and HMRC provides detailed guidance but here is an outline of some key areas which need to be considered.
If cash tips are given directly to staff or left on tables and are kept by individual staff members it is up to the individuals to tell HMRC what they have received. However any tips paid by the employer to employees have to be dealt with under PAYE. Sometimes a troncmaster will control tips and distribute them to employees; PAYE will still need to be operated but depending on the identity of the troncmaster this might be through the employer’s scheme or through a separate PAYE scheme.
National Insurance contributions
In most cases where an employer passes on tips to employees both employer and employee National Insurance contributions (NICs) will be due. However, there are limited circumstances where tips may be exempt from NICs if they meet one of two conditions:
1. Tips are not paid, directly or indirectly, to the employee by the employer and do not comprise or represent amounts previously paid to the employer (for example by customers).
2. Tips are not allocated, directly or indirectly, to the employee by the employer.
HMRC’s guidance gives numerous examples to illustrate how these conditions work in practice.
If tips are given freely they will be outside the scope of VAT. This will be the case whether or not they are passed on to staff. However if a restaurant service charge must be paid by customers (ie it is not voluntary) then it will be part of the consideration for the meal and will be standard rated. HMRC accepts that if customers have a genuine choice as to whether to pay a service charge it will not be consideration.