Tips, Gratuities, Service Charges and Troncs

Booklet E24 Tips, Gratuities, Service Charges and Troncs (PDF 50K) is for employers and troncmasters in the catering and service industries. It covers the treatment of tips and service charges for Income Tax, National Insurance Contributions (NICs), National Minimum Wage (NMW), and VAT purposes. It was revised in February 2005 to clarify some aspects of the guidance.

Following further legal advice, HMRC now consider it necessary to make additional changes to the booklet and pending these being made, sections 7 to 10 of the booklet have been withdrawn. The changes only affect NICs liability.

The February 2005 booklet E24 advised that where payments of gratuities form part of contractual pay or are used to meet obligations under NMW legislation, they are liable for NICs and fall outside the NICs disregard for gratuities even if they are allocated to employees by a tronc run independently of the employer. HMRC, having decided to accept the further legal advice referred to above, has, accordingly, decided that the E24 has to be changed.

This note sets out the main changes in advance of a new booklet being published. Throughout this note "tips" includes gratuities and voluntary service charges.

Changes are also required to:-

You should not rely on the guidance contained about tips in either of these publications until the changes are made.

Details

A tronc is a special arrangement used to pool and distribute tips. It is usually run by one of the employees referred to as a troncmaster and is generally run independently of the employer's influence.

It is important that tips paid to employees are properly treated for NICs purposes because this may affect future contributory benefit entitlement. Payments of tips to the employee continue to be liable for NICs if the employer (1) makes the payment directly or indirectly to the employee from sums previously paid to him or (2) allocates the tips directly or indirectly to his employees. Liability for NICs will always depend on the specific arrangements regarding the distribution of tips that are operated by individual employers.

NICs and NMW obligations

As regards NMW, provided the employer is not (1) making the payment directly or indirectly to the employee from sums previously paid to him or (2) allocating the tips directly or indirectly to his employees, the tips are not liable for NICs.

NICs and tips which are contractual

Our guidance currently advises that if the contract of employment indicates that the employee will be able to participate in the tronc, any payments made by the tronc are liable for NICs because they are contractual payments and therefore not gratuitous.

We now accept that these sorts of payments also fall to be disregarded from earnings and so are not liable for Class 1 NICs to the extent that the employer is not allocating, directly or indirectly, the tips.

Next Steps

  • We have withdrawn sections 7 to 10 of booklet E24 which will be revised to reflect the position outlined in this announcement. As an interim measure an article will be included in the Tax Bulletin providing examples to reflect the position outlined in this announcement.
  • HMRC staff will write to employers who have had a compliance visit, and paid Class 1 NICs on the tips as part of a settlement, telling them about the changes and refund arrangements. NICs liability on tips may depend on more than one feature of the arrangements in place. So NICs may still be due even where tips are used to meet NMW and/ or contractual obligations if the tips are being indirectly or directly allocated by the employer.
  • Having read this note, if an employer who has not had a compliance visit considers that he may have incorrectly paid NICs on tips he should contact National Insurance Contributions Office Refunds Group (Employers Team), Room BP 1001, Benton Park View, Newcastle upon Tyne, NE98 1ZZ with full details so that the matter can be investigated further.

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