Employers in the catering and service industries commonly include the right to participate in a tronc in employees’ contracts of employment.
In the booklet E24 Tips, Gratuities, Service Charges and Troncs issued in February 2004 IR expressed its, then held, view that where employers gave employees a right to participate in a tronc they were influencing or determining the amounts to be allocated to employees and therefore condition 2 of the gratuity disregard ( NIM02922) could not be satisfied. After considering legal opinion in June 2005 HMRC published a revised view in booklet E24. The view held at that time was that where employees had a right to participate in a tronc the payments from a tronc were contractual and not payments of or in respect of gratuities or offerings, so the gratuity disregard ( NIM02905) could not apply.
After considering further legal opinion HMRC’s current
view is that a right to participate in a tronc does not prevent
either of the conditions in Paragraph 5 from being met.
So, even in this situation, provided the employer does not
determine who should receive tips and how much each employee should
receive, condition 2 of the gratuity disregard is satisfied so
there is no NICs liability. HMRC announced these changes on its
website on 17 February 2006.
Facts
Shelagh, the proprietor of a restaurant, includes in the employment contract of all her employees a right to participate in the tronc, which leads her employees to expect they will receive a share of the tronc as a whole. Shelagh does not get involved in allocating the payments nor does she make any further payments to supplement the tips payable.
Commentary
Tips paid by the tronc in such circumstances will not be liable for NICs. Although there is a right to participate in the tronc there is no contractual right to receive payments of any specified amount out of the tronc.
IR’s and HMRC’s views are changes to our interpretation of existing legislation ( NIM02905) following consideration of legal opinion. The legislation has not been amended. Where NICs have been paid in error because the contributor has followed the available published guidance they may be entitled to a refund of those NICs. When guidance was revised in both June 2005 and February 2006 procedures were put in place to allow those who paid NICs in error to claim refunds.
