In the hospitality industry there is the grey area surrounding the tax, NIC and automatic enrolment position in relation to the tips, gratuities and service charges received and how to share these out between the waiting, kitchen and bar team members.
Service Charges
A service charge is added to the bill before it is presented to the customer. It can either be:
- Mandatory. If the charge is paid over to the employee then PAYE and NIC is ALWAYS due on the payment irrespective of the arrangements for payment.
- Optional and discretionary. It must be made clear that the charge is purely optional and discretionary as, when the customer is under no obligation to pay, the charge is a voluntary service charge.
Tips, Gratuities and Voluntary Service Charges
These are spontaneous, optional payments. They can be made in cash or as an addition to a credit or debit card payment.
- If they are in cash, left and collected by the individual employee then PAYE does not apply. The employee is responsible for reporting the amounts to HMRC and income tax is collected usually via an deduction in their PAYE coding notice.
- If they are collected and distributed by the employer, the employer must operate PAYE on the payments.
- If the employer is also responsible for deciding how pooled tips, gratuities and voluntary service charges are allocated or if mandatory service charges are distributed to the employees, the employer must operate PAYE and Employees and Employers NIC on the payment.
- If they are collected pooled and distributed by a third party (usually a Troncmaster) the third party must operate a PAYE scheme, in their name and are personally responsible for all aspects of operating the PAYE scheme, including deducting PAYE tax. No NIC is due on these payments.
Using a Tronc Scheme / a Troncmaster
Where an individual or a business, independent of the employer, is responsible for collecting and distributing the Tips, Gratuities and Voluntary Service Charges that person or business is called the Troncmaster and operates a PAYE scheme which must be entirely separate from the employer’s PAYE scheme.
The existence of the Tronc scheme must be notified to HMRC by the employer and details of the Troncmaster’s name must be given. The scheme will be checked by HMRC to ensure compliance.
Provided the Troncmaster is responsible for deciding how the payments are divided between the employees and the payment is not money originally paid to the employer by, for example, a customer, then the Tronc payment is NIC exempt.
Pros and Cons of Operating a Tronc Scheme
Pros
- There is a financial advantage to both employee and employer as there is no NIC due.
- All employees know the amounts and basis of the payments.
- Tips are organised in an efficient way.
- Teams are motivated to give better customer service, reduce waiting times and rewards can be given for individual or group achievements, loyalty etc.
Cons
- There will be set up costs.
- There will be an administration burden on the employee who liaises with the Troncmaster.
- There will be difficult decisions and discussions on the basis of distribution for the employee liaison.
Tronc Schemes and Automatic Enrolment
Where a hospitality business has a compliant Tronc scheme in place this should not impact on their automatic enrolment duties provided the employee does not have a contractual right to receive payments.
The Tronc scheme should have its own AE scheme in place however the monies paid from Tips, Gratuities and Voluntary Services Charges do not form a stated part of the assessment criteria for AE. The Pension Regulator states that it is up to the employer to decide if these payments form part of the employee’s salary or wage and as the payments are not within the employer’s decision nor control it seems unlikely that they form part of the qualifying earnings for the AE assessment.
Final Points
- There is no legal or statutory obligation to operate a Tronc scheme.
- A restaurant, hospitality business etc. may have a number of Tronc schemes running for different employees.
- Tips cannot be used to make up the national minimum wage.
- HMRC must be notified one way or another.[1]
[1] Reproduced from Croner-i