Tips back on top

On February 12, 2006, HM Revenue and Customs (HMRC) announced significant changes to its interpretation of the regulations governing the calculation and payment of national insurance contributions (NICs) and the national minimum wage (NMW) applicable to tips and gratuities paid to employees under tronc arrangements.

The guidance booklet, E24, relating to tips, gratuities, services charges and troncs, has been removed with immediate effect and we're still waiting for the new guidelines to be published.This news is a victory for the hospitality industry, which had criticised the existing regulations for their inefficiency, complexity and impracticality. HMRC now accepts that NICs will not be payable on tips and gratuities allocated to staff under a tronc arrangement unless a business has directly or indirectly allocated those tips and gratuities to staff, that is where the employer either directly, or through another person, decides who the recipients under the tronc arrangement are and how much they are to get.

The key changes are:

• Tips or gratuities paid by customers and distributed to employees under an independently-run tronc are not liable to NICs. An independently-run tronc is a tronc arrangement in which an employer does not allocate, either directly or indirectly, a specific amount of tips or gratuities to an employee.
• If an employment contract entitles the employee to participate in an independently-run tronc arrangement, funded by tips or gratuities from customers, these tips and gratuities will be exempt from NIC. This exemption applies even in circumstances where the tips and gratuities are allocated at the discretion of the troncmaster.
• Payments that count for NMW purposes will be disregarded for the purpose of calculating NICs. This change is subject to the conditions that the tronc is independently run and that the payments are not paid directly or indirectly to the employee from sums previously paid to the employer or distributed to the employee via the payroll.
• Employers in the hospitality, catering and service industries should be entitled to repayment of NICs paid on distributions to employees under a tronc arrangement prior to February 12, 2006, which results from the erroneous guidance by HMRC.
• For the avoidance of doubt, it should be noted that although payments under a tronc arrangement are excluded for NIC purposes in the circumstances outlined above, PAYE provisions continue to apply with respect to payments distributed from the tronc by the troncmaster.

These changes have retrospective effect. In other words, HMRC's reinterpretation of its guidance on NICs is not only a statement of how it will apply the regulations in the future, but how they should have always been applied. In its February announcement, HMRC indicated it would write to those employers who were subject to a compliance visit and who paid NICs in respect of tronc arrangements as part of a contract settlement.

Repayment​

HMRC has advised other employers in the catering and service industries, who have not entered into contract settlements, to contact HMRC to find out if they are entitled to a re-payment of NICs. However, before contacting HMRC, employers should be aware that:

• There is scope within the regulations to claim repayment of NICs erroneously paid
• Interest may be payable by HMRC on the repayments to employers.

It is unclear from the HMRC announcement whether repayments of NICs erroneously paid to HMRC will automatically include a component for interest, or whether the entitlement to interest will need to be established by employers on a case-by-case basis. Employers must now review their tronc arrangements in order to make sure they are not paying more NICs than is absolutely necessary. Businesses which have made payments of NICs to HMRC now need to seek professional advice to see if they will be entititled to refunds.

Martin Caplice is a solicitor in the tax investigations and disputes group at DLA Piper. He can be contacted on 020 7796 6151