Tips, Gratuities and Service Charge

Unlike most payments an employee will receive, with some careful planning, it is possible for the allocation of tips, gratuities, and service charge in a National Insurance (NI) efficient way. The following provides a high-level summary of the points you must consider, whether you have a tronc scheme in place or are thinking about introducing one.

It is important to bear in mind that HMRC will attempt to recover any underpaid income tax and NI from the employer, even where a tronc scheme is in place.

Currently, the hospitality sector is facing many challenges, staff retention being one of them. Ensuring you have a compliant tronc scheme can help to attract and retain good quality employees.

What is a tronc?
A tronc is a way of collecting and distributing tips, gratuities, and discretionary service charges to eligible employees. Whilst it is not exclusive to the hospitality sector, it is widely used within the industry and there are several advantages to operating a tronc. Specifically, it is a transparent way of dealing with the distribution of tronc on a fair basis, whilst considering the views of your employees.

However, we do recommend a degree of structure is put in place whereby tips, gratuities and voluntary service charge are allocated through a tronc, with the responsibility for the scheme resting with a troncmaster and not the employer.

What is a troncmaster?
A tronc must be managed and controlled by an individual known as a ‘troncmaster’. Ideally, the troncmaster should be viewed as ‘independent’ to the owners/management of the business, e.g. a General Manager. It is common for the employees to support the troncmaster via a tronc committee, made up of representatives of employees who will potentially receive tronc payments.

No specific appointment process needs to be followed, but the troncmaster must be willing to undertake the role, and they must understand and accept their responsibilities. They are responsible for allocating the tips, gratuities and voluntary/discretionary service charges which make up the tronc funds. Employees must be made aware of who the troncmaster is and be able to discuss all matters relating to the tronc with them.

Whilst the employer can appoint, replace, or remove the troncmaster, they cannot influence how the tronc funds are to be allocated.

Who can participate in the tronc scheme?
A tronc scheme should only include staff who are employed in the company and on the business payroll within the tronc. Whilst this can include casual and seasonal employees, it is not possible to include agency workers.

It is common practice for the distribution of tronc funds to be dealt with on a points system, or ‘hours worked’. It is best practice for all employees to be made aware of their entitlement to participate in the scheme, and the basis upon which tronc funds are allocated.

There is nothing to prohibit the troncmaster, senior managers or directors, from taking part in the scheme… However, care should be taken to show there has not been any abuse of power or that the awards given are disproportionate in comparison to other staff members.

Treatment for income tax and NI purposes
Income tax is due on all tips, no matter how they are received, such as cash tips from the customer or as part of a formal tronc scheme.

However, where the employer is not involved (directly or indirectly) withthe allocation of tronc funds, these payments will not be liable to Class 1 NI for either the employer or the employee. This contracts with any situation where the employer allocates the distribution of any tips, gratuities and service charge.

It is important to ensure that the employee is not contractually entitled to receive any tronc, nor are there any guarantees that they will be entitled to receive a given amount.

Planned changes to the tronc
It is important to consider any future developments. One such development is the Employment (Allocation of Tips) Bill, which was introduced on 15 June 2022. It is expected to become law in England & Wales and Scotland within the next 24 months.

Currently the Bill proposes that:

• All tips must be passed on to employees in a fair and transparent manner.
• All tips must be allocated/distributed by the end of the month following the month they were collected.
• The business will not be permitted to retain any amounts from the tronc funds collected, even if it is intended to meet costs such as credit card charges or payroll costs.
• There must be a full set of tronc scheme rules with details relating to how tronc funds are to be allocated. This must be shared with all employees.
• Employers will have an obligation to provide a record of the tronc funds received by any employee over a rolling three-year period.
• Agency workers will be entitled to receive tronc in the same way as employees.
• Employees who receive tronc funds will have a right to take any disputes to the Employment Tribunal.

Whilst we are still waiting for the final version of the Bill, employers will need to consider what changes need to be put in place.

How haysmacintyre can help
We have considerable experience within the hospitality sector and working with many leading brands.

As part of our tronc review service, we will consider the following:

• Do you currently operate a tronc scheme? If so, how confident are you that it is set up correctly?
• Do all your employees know how the tronc funds are distributed?
• Are employees and customers aware of your tronc policy?
• When were employees last advised about their entitlement to receive tronc funds?
• Who is responsible for the allocation and distribution of the tronc funds?
• Is your troncmaster aware of their responsibilities for operating the tronc scheme?
• How are you managing the income tax and, where relevant, the NI compliance obligations connected with the distribution of tronc funds?
• When was the last time the arrangements were reviewed?

Reviewing your existing arrangements should be carried out on a regular basis, especially given the obligations employers will be required to fulfil under the forthcoming Employment (Allocation of Tips) legislation.

Please contact Nick Bustin, Director of Employment Tax, or Emma Bernardez, Head of Hospitality, if you wish to discuss matters further.