01 July 2019
Diana Bruce MCIPPdip, CIPP senior policy liaison officer, explores the process and proposals
The government acknowledges that whilst most businesses act in good faith and pass on the tips that 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.
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’...
A tronc scheme is an arrangement 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 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.
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:
- clear to consumers that they are voluntary
- received by workers
- clear and transparent to consumers and workers in terms of how the payments are treated.
No government response was ever published to this particular consultation.
However, the subject came up again in the Taylor review of modern work practices (‘the Review’, launched in October 2016) which was tasked with ensuring that our system of employment rules are fit for the fast-changing world of work and to identify how employment practices need to change in order to keep pace with the modern business models.
The Review was to consider the implications of new forms of work on employee rights and responsibilities as well as on employer freedoms and obligations, including views from workers and employers working in sectors such as the ‘gig’ and rural economies and manufacturing, to fully understand the impact of modern working practices and how different labour markets work. A very broad remit, with many outcomes. The government’s response to the Review – the Good work plan (published December 2018) pledged to “legislate to ban employers from making deductions from staff tips”, other than those required under tax law.
The government believes “this legislation will offer a financial benefit to workers who will receive the tips they earn. Many of these workers are earning the minimum wage. It will also give consumers reassurance that the money they leave in good faith to reward service is going to the staff as they intended.”
This does still cover the broad policy objectives initially laid out by BEIS so although consultation seemed to have come to standstill, it has reappeared through the Good work plan.
...a £10.00 tip could cost the employer as much as £3.75 in charges to pay over
We in the policy team have been liaising with the policymakers from BEIS to establish just what the pledge to ‘legislate to ban employers from making deductions from staff tips’ will mean for payroll. As part of this work we published a survey to members and the wider payroll profession during December and early January 2019 to gauge what the impact might be.
BEIS was keen to understand whether there will be any costs brought about by this policy and, if so, whether they are one-off costs to introduce the policy or whether there would be any ongoing costs, and also how long it might take for employers to bring about these changes.
We asked how long it would take to make changes to the payroll system to reflect a change in tip distribution. Answers varied from half an hour to five hours and comments included:
- It will be the clients making the change.
- Audits may need to be run on the current system to implement any changes.
- Those not currently running a tronc scheme would have to set one up.
- Even those with a tronc scheme will need to check processes with troncmasters.
One comment was interesting about those smaller organisations that could lose out when customers use credit cards to pay the tip and the credit card company still charges a fee for that part of the transaction. The example used was that a £10.00 tip could cost the employer as much as £3.75 in charges to pay over.
We asked about workers’ contracts and if they currently indicate how tips are distributed, and how long it would take to amend them if necessary. Answers varied but in the main it didn’t come across as hugely time intensive as contracts are updated from time to time anyway.
We asked how long it would take to create records of how tips are distributed, if necessary and how long it would it take to maintain and update the records of how tips are distributed. Again, this came across as not being time intensive as most keep records anyway.
It was not difficult to conclude that tronc schemes are without doubt the way forward, even taking into consideration the time it may take to set one up. It involves a one-off cost, but regardless of whether or not the employer deducts an admin fee, processing the tips through a tronc scheme do not attract employee or employer NICs.
Of course, care must be taken, as with everything in the complexities of payroll processing. A troncmaster with a PAYE scheme may use the employer’s payroll to operate PAYE on his or her behalf but the tronc scheme must be run independently of the employer’s scheme. The associated PAYE records must also be kept entirely separate.
A NMW trap
On a final note – and as more of a reminder than anything – in any given pay period a worker’s pay must not fall below the national minimum wage (NMW). An employer who fails to ensure this could be faced with financial penalties and may be named-and-shamed in a government press release. We have certainly seen examples of well-known employers hitting the headlines for unintentionally paying below NMW rates.
One of the most common payroll-related mistakes is including tips, gratuities, service charges and cover charges as part of minimum wage pay. They do not count even if they are administered through payroll and so they should never be included when calculating NMW pay for employees.
|Amount of tip||£100.00||£100.00||£100.00||£100.00|
|Amount paid to Treasury||£32.50||£57.88||£52.79||£20.00|
This article was featured in the July/August 2019 issue of the magazine.