In this blog we will discuss the difference between Tips, Gratuities, and Service charges, and when a TRONC arrangement is necessary. To the public these are collectively known as Tips. However, you need to know the difference between them, and how they are treated for tax purposes.
This is the most common type of tip and is “left on the table” for an individual member of staff, representing the customers appreciation for the good service they have received. The staff will thank the customer for your generosity and will go home with a little bit of extra cash that will top up their minimum wage income.
Tips stands for “to insure prompt service” and is usually a sum of money paid to an individual in hospitality, in advance of a good service. The best example to explain a tip is a story I heard about a customer ripping a $50 note in half when they arrived at a hotel in the Caribbean, and informed the waiter on their first day, “if you look after me during this visit, I will hand you the other half before I leave”. The guest received excellent service during their holiday and the member of staff that gave them the VIP treatment was handed the other half as promised, so received a generous tip of $50.
A service charge is a percentage added to the bill to cover service, a predetermined gratuity you could say. It can be mandatory or discretionary. It’s mandatory if the customer has no choice but to pay it, and discretionary when the customer can choose to have it removed from the bill. It can be any amount set by the owner of the pub or restaurant but is usually around 12-15% of the total bill.
If the service charge is mandatory, then this will be classified as part of the business revenue and not treated in the same way as tips or gratuities at all for tax purposes, and will also be subject to standard rate VAT, if applicable. All other tips, gratuities, and discretionary service charges fall outside of scope for VAT. Next time you visit an establishment that adds a service charge to the bill, you should notice wording on the receipt stating that it is discretionary, and you can ask for it to be removed. I have quite often asked for this, when I would rather leave a cash gratuity, that is more than the amount added to the bill by the owners.
HMRC and Tips
From now on we will collectively refer to gratuities, tips, and discretionary service charge as “Tips.”
A Tip left on the table or paid-up front to an individual for providing good service doesn’t go through their payroll so they haven’t been taxed through the PAYE scheme, but as law abiding taxpayers, they will inform HMRC of this extra income, and add this to their self-assessment, or make other arrangements to pay whatever tax is due. How, why, and when they are taxed isn’t your problem and has nothing to do with you, the business owner, right? Well in this simple example that is right, and you can sleep at night knowing that on this occasion your staff are happy and collecting taxes for HMRC in this example isn’t your responsibility. Everyone’s happy, apart from the chef who prepared the meal, or the bar manager who cleans the beer lines and orders the wine, and every other member of your team that has something to do with the customers’ experience but hasn’t received any tips!
In hospitality, however, it is more common to pool the tips so that they can be distributed amongst all staff whether they are customer facing (front of house) or in the Kitchen (back of house). When the tips are distributed this way, it’s a whole different ball game. It now depends on how the tips are shared, and by whom, that will determine how they will be treated by HMRC.
Welcome to Tronc, the system designed by HMRC, setting out the rules and guidelines on how to pool and distribute the tips in the most efficient way for tax purposes.
Why is it called Tronc? Well, it’s believed to be from the French word “tronc des pauvres” meaning the poor box. This was a box in the church that collected money for the poor which was then distributed.
If you want to know the detail, the guidance can be found here
, where you will notice that HMRC have provided fifteen examples of different ways that Tronc can be taxed. There are even specialists’ companies that offer to assist you with setting up and managing a Tronc arrangement in the most efficient and compliant way, and some even offer insurance to make sure it will not be challenged successfully by HMRC. Whatever you choose to do, I would advise that you at least discuss this subject with your hospitality specialist accountant.
If you follow the strict guidelines provided by HMRC, the distributed Tronc will be subject to tax deductions only, but no national insurance contributions (NI) will be due by the employee or the employer (you).
In summary the main guidelines are:
1. Appoint a Tronc-Master, who must be a member of staff, and have nothing to do with the ownership or control of the business.
2. The Tronc-Master must have complete responsibility for how the tips are pooled and distributed, and they will be responsible to HMRC for collecting the taxes due.
3. HMRC must be informed that you have set up a tronc arrangement, and the details of the Tronc-Master should be provided.
4. The service charge must be discretionary.
5. There must be no contractual obligation to pay any employee a guaranteed amount from the Tronc. Therefore, you cannot employ anyone and inform them they will receive a minimum amount from the Tronc arrangement.
6. You cannot use the Tronc to top up minimum wage, meaning any Tronc should be paid on top of the minimum wage.
Once the Tronc arrangement has been implemented, your Tronc-Master could keep a spreadsheet which shows all the pooled tips, and how much has been distributed to each member of staff. Until 2023, there was no obligation to the owner of the business to distribute the tips collected to the staff.
Over the years there have been a lot of hospitality businesses that have kept back a management charge from the Tronc, so the staff have not received all the pooled tips. I even heard of a Café in London that kept 80% of the tronc as a management fee (not a client of mine by the way!). Until recent years the management fee held back from the Tronc has not been regulated, but following the Queens speech in 2019, steps have been taken to introduce legislation to ensure that hospitality staff receive all the pooled tips. The Employment (Allocation of Tips) Act received Royal Assent on 2 May 2023, and the main changes, as follows, are expected to come into force in 2024.
• All Tips collected must be distributed to the staff.
• The staff receiving the tips must be involved in the service, excluding any admin, Directors etc.
• All Tips must be distributed within one month of the month end. So, Junes Tips must be paid by the end of July.
• All staff can request to see how the tips are distributed.
• Agency workers will now be able to benefit from the pooled tips.
I hope you have found this article helpful, and if your business is currently receiving tips, gratuities or service charge please contact one of the Accredited Advisors
with the BII.
David Burr from Carroll Accountants – a BII Accredited Advisor