HMRC tips up on Tronc Schemes

When a national pub chain approached HMRC for advice on setting up a system to deal with the tax due on credit card tips their payroll department was initially advised to set up 860 separate PAYE schemes, one for each of its managed public houses.

Bob Newsome, former Payroll Manager with the Spirit Group, says, “Obviously, setting up and managing 860 extra PAYE schemes was an unacceptable burden for the Spirit Group and I was keen to work with HMRC on finding a solution. I raised the issue through the Taxpayer Data Standards Forum, an employer consultation group I am actively involved with.”

In turn, HMRC held wide ranging discussions with tax and National Insurance technical experts across the Department to seek acceptable options that would also minimise similar burdens across the hospitality and leisure industries.

The solution

Credit card gratuities can be disregarded as earnings for National Insurance purposes if a Tronc Master; or in the case of the Spirit Group, a pub manager; independently stipulates what cash amounts are payable to individual employees so that the tips are not directly or indirectly allocated by the employer.

It was agreed that individual pub managers across all Spirit Group pubs will total the credit card tips given every week in their pub and allocate specific amounts to each employee using a system that they will decide.

Although the pub managers represent the employer, and may indeed be viewed by local workers as their employer, each manager will be free to decide how they allocate tips to their staff and will do so independently of the Spirit Group management. The true employer, Spirit Group, will not therefore decide in any way how tips are allocated to workers in its pubs. This will ensure that payments can be disregarded so that employees will not be required to pay National Insurance on their tips. Details of these payments will be notified to the payroll department by weekly spreadsheet and the tips paid to the employee via normal salary arrangements.

This gives assurance that the employer will have no involvement in the process and will not influence how the tips are allocated; an essential element which ensures sufficient independence of the 'Tronc' system from the employer. The weekly spreadsheet has the added advantage of providing acceptable record keeping.

HMRC’s National Insurance technical expert said, “If the employer is involved in saying which employee gets what in terms of credit card tips, the payments cannot be disregarded and the employer must add the tips to other earnings when calculating how much employer and employee National Insurance must be paid. The employer is responsible for deducting both the employer and employee National Insurance.”

Although Spirit Group pub managers will operate as nominal Troncmasters, this will not be a fully operational Tronc system because monies are not actually passing through the pub managers’ hands. So HMRC does not require a separate PAYE scheme.

HMRC’s PAYE technical expert, says, “As the gratuities will be put through the payroll, the employee will pay tax on these alongside normal salary and this is perfectly acceptable from a PAYE perspective.”

Once the new system was adopted by the Spirit Group, Bob added, ”The new system has saved the Spirit Group a significant amount of time and effort. We now have an efficient credit card Tronc process that benefits Spirit Group employees, helps customers leave gratuity payments and as a result will bring in a little extra revenue to HMRC.”

Some tips on Troncs

  • Definition of Tronc – a system to allocate tips, gratuities and service charge payments to employees.
  • Cash tips given to the employee by the customer are the responsibility of the employee and must be declared to HMRC.
  • All tips, gratuities and service charges are taxable regardless of how they are paid to the employee.
  • Currently tips and gratuities can count towards National Minimum Wage pay if they are paid to the worker via the employer’s payroll. However, following a widely publicised consultation exercise, the legislation is being changed and from 1 October 2009 tips, gratuities, service charges and cover charges cannot count towards the National Minimum Wage.