Previous magazine articles 
The tipping time bomb
As HM Revenue & Customs dispatch 'mystery diners' to hotels and restaurants across the country, they're leaving a trail of financial land mines in their wake.
Brian Lovie warns that businesses will face tough penalties if they ignore the regulations surrounding taxation of employees' tips…
Make no mistake about it; HMRC is on the warpath and is cracking down on hoteliers and restaurateurs who use tips as an enhancement to employees' wages. Using so-called 'mystery diners' who leave tips in restaurants and then check at a later date to establish whether the amount has been put through the books, it can be a costly oversight if your business is caught out.
There is often confusion over the distinction between service charges, and industry managers are being tripped up by their own lack of clarity about the taxation of certain types of payments to employees.
Put simply, a service charge is a compulsory addition to the price charged for accommodation, meals and drinks, while tips and gratuities are discretionary rewards from guests to staff.
If you elect to distribute service charge income to employees via the payroll, you should remember that the amount is counted when determining pay for minimum wage or other statutory purposes. Class 1 National Insurance Contributions (NIC) must be paid on them by the employee and the employer.
Service charges levied by a hotel or restaurant are liable to VAT, whereas tips and gratuities are not. The way in which tips are distributed determine how they should be treated for income tax and NIC purposes. When employees receive additions to their basic pay from service charges, pooled tips or gratuities direct from guests, technically these payments are added to their income for tax purposes.
If those additional amounts are paid through your hotel or restaurant's payroll, tax is collected through the normal PAYE system. If paid through a pooling arrangement, the Tronc Master – someone independent of the employer, such as the head waiter – is responsible for operating PAYE on the amounts paid. The employee should declare amounts received in any other way. If the amounts allocated are decided by the tronc master, or if a guest pays a tip directly to an employee, there is no liability for NIC.
In a recent welcome U-turn, HMRC accepted that 'charged tips' – an amount added voluntarily by the customer to a bill being settled by credit card - are not subject to NIC if paid over by employers to troncs.
However, the British Hospitality Association has mounted a legal challenge against HMRC's view on the administration of the tronc system.
Employers who stipulate in their staff contracts the amount of guaranteed tip to be paid over and above their weekly wage, should do so with caution and be aware that HMRC will seek both PAYE and NIC contributions.
You have been warned…
Brian Lovie,
Director
PKF Accountants & Business Advisers
Email: Brian.Lovie@uk.pkf.com
This article has been edited from its original version. For the complete feature please see Catering in Scotland magazine February/March 2007.
To join our database, go to Media Pack on this website and click on Subscribe.
