A Guide to Tips for Employers in the Food & Catering Industry
Understanding the tipping industry and how it’s Taxed
Tips whichever way they are given is also taxed. But how they get taxed, whether subject to National Insurance or not, depends mainly on how they are earned.
What are the possible ways in which tips are received and can be taxed and reported on?
- Through mandatory service charge
- Gratuity paid as either part of card payment or cheque
- As discretionary service charge
- Some cash gratuity placed in the staff tip box; Cash gratuity awarded to the staff member
Definitions of Various Terms related to Tipping in Catering Industry
A Tip/Gratuity: This is a term describing the type of payment that is freely given by a client or customer in appreciation of outstanding services, waiting, food and so on. It can be given as cash or simply included in the bill.
Service Charge: An additional charge that is usually added to the client’s or customer’s bill. It is an automatic process in those restaurants that have adopted it as their policy and can be optional or mandatory for the customer to pay.
A Tronc: A pool of tips collected by an employee representative or employer for allocation to the rest of the staff members.
Taxation: Tips are subjected to income tax on the basis of how and by whom they are collected. The NIC treatment is complicated, tips are exempted from the NIC only if they are allocated or paid directly or indirectly to the employees by their employers. Speak to a competitive accountant or experts from an accounting firm when setting up a tipping system in your restaurant, café or bar.
- Mandatory Service Charges: These charges are not categorized as tips given that customers are compelled to pay them regardless of whether they have a choice to do so or not. When they are passed to the employees by their employer, they are included in the wages where they become subjected to NIC and tax on the payroll. Make sure your Payroll Accountant is aware of any such tips so they are able to reflect, tax and report them correctly.
- Voluntary or Discretionary Service Charges: These are part of the bill to be settled by the customer and are paid to the employer. In case the employer allocates them to the employees, they become part of the employee’s salary. Therefore, the employer is compelled to operate NIC and PAYE on such payments for the employees’ payroll. In case the employer assigns one of the employees to distribute these service charges to other employees, then NIC is not due. As such the whole responsibility of operating PAYE is placed on the shoulders of the employee. The same case is true for tips given as part of a cheque or card payment as explained below.
- Tips paid as Part of Cheque or Card Payment: Although a rare practice, an employer can have a separate record of tips belonging to each staff member in order to pay them individually. If it happens that way, the employer should operate PAYE to make it easy for tax accountability. However, tips become exempted from NIC just in case the employer isn’t making any decisions when it comes to the allocation of the same. In most cases, tips are pooled prior to distributing them among the staff members. In actual sense, this is what is referred to as a tronc. The NIC and precise tax treatment depending on the employer’s decision to allocate these tips to the employees. Speak to your accountant if you are unsure about the treatment of tip collections instead of guessing on how to proceed.
If a member of staff allocates the payments: The particular employee who does the allocation is given the title of the tronc master. More often than not, the staff member who takes this title is either the head waiter/waitress or the maitre d and the person is responsible for operating pay-as-you-earn (PAYE) on all tips although NIC is not due.
If the allocation of payment is done by the employer: Here, the employer is said to be taking over the role of a tronc master and thus the tronc is ignored completely. Therefore, the employer will have the responsibility of operating PAYE through payroll. Also, NIC is due because the payment is being made and allocated by the employer. The same case applies even if the employer decides to delegate the physical distribution of tips to someone else.
- Cash paid through the Tip box and then distributed: This is also a tronc whereby the treatment remains identical to that of tips paid via card or cheque payment process.
- Cash Given Directly to the Staff Member and Kept: If it happens this way, the employee has full responsibility of reporting the amount to HMRC and preparing a good tax report on the tips. Employees have the obligation of reporting tips on their tax return as well as contacting HMRC to arrange for their appropriate PAYE registration code for the next year based on an estimated tax on tips. NIC isn’t applicable here. Staff members should find a good accountant, tax accountant or accounting firm to help process their self-assessment.
Troncs: This refers to the arrangement where tips are pooled before they are divided out as opposed to what the staff is given to keep. Here, the responsibility for taking tips and dividing them is delegated to a head waiter or waitress. A separate PAYE scheme applies where a tronc is operational and the tronc master is responsible for operating the scheme correctly in addition to being reliable for consequences of failing to do. The tronc master is allowed to operate tronc PAYE using the employer’s payroll while the employer acts as an agent. But the tronc records should be kept separately.
VAT: Tips are beyond VAT’s scope when they are given freely despite being collected by the employer and subsequently distributed to the employees.
Mandatory service charges become subject to VAT (being part of the underlying supply) because the customer doesn’t have a choice of whether to pay or not.
Clear House Accountants are specialist Accountants in London who have years of experience working within the food industry helping restaurants, cafés, takeaways, bars etc. stay compliant and tax-efficient while helping them create smart and effective solutions to grow their business and measure their performance. If you want to learn more about how we can help speak to us to learn more.