PAYE72080 - PAYE operation: payments for PAYE purposes: tips, gratuities, service charges and troncs
Tips, gratuities and service charges are payments made by customers for service received and the following provides information about how these payments are handled for PAYE and NIC purposes.
Cash tips - employer not involved
Employer passes tips / service charges to employees
Troncs
PAYE failure
Employee’s PAYE credit
National Insurance liability on tips, gratuities and service charges
Further advice
Cash tips - employer not involved
Cash tips handed to employees or left on the table by customers and retained by employees are not subject to PAYE or Class 1 NIC. If employees receive tips in this way the employee’s tax code should be adjusted to take account of the tips (employees should be consulted to establish the level of tips and forewarned of coding restrictions).
Employer passes tips / service charges to employees
An employer must operate PAYE and Class1 NIC if
- They pass tips to employees that are
- Handed to the employer by employees
- Left in a common box / plate by customers
- Included in cheque and debit / credit card payments to the employer
- They pass service charges to employees
The obligation to operate PAYE / NIC remains with the employer where the employer
- Delegates the task of passing the tips or service charges between employees, for example to a head waiter in a restaurant
Or
- Passes tips / service charges to a tronc (see below) but the tronc is not a tronc for PAYE purposes
Troncs
Where tipping is a usual feature of a business there is often an organised arrangement for sharing tips amongst employees by a person who is not the employer. Such an arrangement is commonly referred to as a ‘tronc’. The person who distributes money from a tronc is known as a ‘troncmaster’. Where a person accepts and understands the role of troncmaster (which includes the operation of PAYE) there is a tronc for tax purposes and the troncmaster may have to operate PAYE.
From 6 April 2004 the Income Tax (Pay As You Earn) Regulations 2003 require an employer to
- Notify HMRC of the existence of a tronc created on or after 6 April 2004
And
- Give the troncmaster’s name (if known)
There are no hard and fast rules regarding how a tronc should operate and HMRC must apply PAYE and NIC rules to the particular circumstances of each tronc. A troncmaster is not responsible for deducting National Insurance. If NICs are due on tronc payments the employer is required to deduct and account for them (there is further information on NIC below).
When you are notified of a tronc you should
- Confirm that there is an organised arrangement for sharing tips and determine
- How the tronc receives monies (for example employees paying in cash tips or an employer paying in credit card tips)
- Who holds the tronc monies and how (for example, is there a tronc bank account and if so who operates it?)
- On what basis are distributions made from the tronc and who decides that basis
- Which employees are tronc members
- Whether the person said to be the troncmaster accepts and understands the role (including the obligation to operate PAYE)
If you are satisfied that there is a tronc for PAYE purposes (bear in mind that a business could have more than one tronc, for example a hotel could have separate troncs for restaurant staff and housekeeping staff and each should be dealt with separately)
- Arrange for a PAYE scheme to be set up in the name of the troncmaster. Further information can be found in ‘TRONC Scheme’ PAYE20160
PAYE failure
Where someone other than the employer is involved in the distribution of tips it is essential to ascertain the full facts to be able to determine the tax and NIC treatment.
Where there has been a PAYE / NIC failure it is not unusual for the employer to say that the troncmaster is responsible and for the troncmaster to say that he / she was acting on behalf of the employer.
Where there is a dispute regarding PAYE responsibility and if back years are involved consult your local Compliance Team.
If a troncmaster is responsible for operating PAYE on monies passed to the tronc by the employer and has failed to fulfil his / her PAYE obligations, the employer can be directed to operate PAYE on monies passed to the tronc from a specified future date. HMRC directs the employer (under Regulation 100(4) IT (PAYE) Regulations 2003) to operate PAYE on future payments even if the troncmaster distributes the money to tronc members.
Note: If you have a case where you think that a direction to transfer the obligation to operate PAYE from the troncmaster to the principal employer may be appropriate, send it with the full facts to Personal Tax Product & Process, PAYE Technical, (This text has been withheld because of exemptions in the Freedom of Information Act 2000).
Employee’s PAYE credit
If the employer or troncmaster fail to operate PAYE, the employees are entitled to a PAYE credit if the tips are included in their Self Assessment. This is so the tax is not collected from the employees.
National Insurance liability on tips, gratuities and service charges
Guidance on NIC liability is given in the National Insurance Manual at NIM02900.
Class 1 NICs are due where customers
- Pay a mandatory service charge (Word 24KB) and the employer passes some or all of these charges onto employees, either directly or by using a tronc. Regardless of who pays the charges to the employees the employer, not the troncmaster, is responsible for the NICs
Or
- Pay voluntary service charges and / or tips to the employer
And
- The employer passes all or some of the charges / tips to employees
- The employer passes some or all of the charges / tips to a tronc and decides or directs who should be paid from the tronc and how much they should receive
Class 1 NICs are not due where
- Customers pay tips direct to employees and the employer is not involved
- Customers pay voluntary service charges and / or tips to the employer
And
- The employer passes some or all of the charges / tips to a tronc
And
- The employer is not involved in deciding how much each tronc member receives from the tronc
Further advice
Advice for employers and troncmasters is available in
- Booklet E24 (PDF 76KB) Tips, Gratuities, Service Charges and Troncs
And
- Booklet CWG2, Employer Further Guide to PAYE and NICs
Note: Booklet E24 is not available from the Employer Orderline but it can be viewed
- Online at www.hmrc.gov.uk/helpsheets/e24
Or
- On the Employer CD-ROM
