PAYROLL INSIGHT
Tipping
Diana BruceMCIPPdip, CIPP senior policy liaison officer, explores the process and proposals
T he government acknowledges workers earn for good service there are a small number of employers that negligently retain tips earnt by their staff. This is being addressed through legislation which I will come to later. What are tips, gratuities, cover or service charges? Workers in the hospitality sector who are customer-facing may receive tips or gratuities from customers, or customers might pay a specific cover or service charge. There are various ways that an employer will deal with such ‘tips’. Dataplan, a company that processes payroll for many clients in the hospitality industry, has identified four common ways that employers deal with tips (assuming that they are actually being processed in some way and are not just given as cash in hand for employees to sort out their own tax position): ● ● employer keeps everything passing no benefit to employees (scenario 1) ● ● employer keeps 10% of total receipts (scenario 2) ● ● employer increases payroll so that they receive no benefit (scenario 3) ● ● an effective tronc scheme (see below) is in place (scenario 4). The table on the opposite page details how a tip would be distributed under each of the four common scenarios with the calculation worked on the assumption that an employee is subject to National Insurance contributions (NICs) and tax at basic rate and is also a member of an automatic enrolment pension scheme. that whilst most businesses act in good faith and pass on the tips that
As you can see the Treasury gains the most from scenario 2 where the employer actually ends up with a deficit (why would they?); whereas scenario 1 is the other extreme where the employer benefits the most by keeping all the tips and paying their dues to the Treasury, which however is not a good way to incentivise the employees. Scenarios 3 and 4 leave the employer in a neutral position; but scenario 4 (tronc scheme) is the best option for the employees – after all, they are the ones who have worked for the tips. ...to pool tips, gratuities and service charges with their distribution made by a designated ‘troncmaster’... sometimes used to pool tips, gratuities and service charges with their distribution made by a designated ‘troncmaster’ under a pay as you earn (PAYE) scheme that is separate from the employer’s PAYE scheme. If employees get payments through a tronc, the troncmaster must run a payroll and report the information to HM Revenue & Customs (HMRC). If the employer leaves it up to the troncmaster or someone else, who is not acting on the employer’s behalf, PAYE tax is due on the payments but no NICs Tronc scheme A tronc scheme is an arrangement
are due. Hence, the tronc scheme is the most favourable to the employee and the employer does not have to pay any NICs either, keeping the cost to them completely neutral. Payments of tips do not attract NICs if the: ● ● troncmaster is allocating money that originally was not paid to the employer and the employer does not pay the money directly or indirectly to their employees ● ● employer does not determine, directly or indirectly, the allocation of those tips. By ‘allocation’, HMRC means deciding who should receive what amount by way of tips. With primary (employee) NICs set at 12% between certain thresholds and secondary (employer) NICs set at 13.8%, it’s a win-win situation to save combined revenue from tips by simply setting up a tronc scheme. ‘Good work’ In 2015 a call for evidence was published delving into the complexities of the tipping process, followed in 2016 by a further consultation on tips, gratuities, cover and service charges which detailed proposals for further action on fairness and transparency. We at the CIPP surveyed payroll professionals and duly sent our formal response to the Department for Business, Energy and Industrial Strategy (BEIS) (previously the Department for Business, Innovation & Skills) summarising our findings. In the consultation BEIS said the government believes that all discretionary payments for service should be subject to three broad policy objectives:
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| Professional in Payroll, Pensions and Reward | July/August 2019 | Issue 52
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