Analysis: Taxman issues new tronc guidelines

Detailed new guidelines have been issued by Her Majesty's Revenue and Customs (HMRC) on the procedures for distributing tips to staff through tronc accounts.

The guidance follows a long debate between the taxman and the hospitality sector over the practice of counting tips as part of minimum wage payments to staff. Many food businesses operate a 'tronc', a separate fund to distribute tips to kitchen and waiting staff. Since these tronc payments are often counted when calculating the minimum wage, the revenue had argued that national insurance (NI) should be paid.

Following a legal challenge by the the British Hospitality Association (BHA), HMRC conceded that this stance was wrong, accepting that tronc payments can be made without NI being due, as long as the money is distributed by an independent tronc master.

Martin Couchman, deputy chief executive at the British Hospitality Association, said: "The announcement is great news for the British hospitality industry. HMRC has listened to the suggestions we have made and produced clearer and more practical guidance for our members to use."

The new guidelines, known as E24, have a clear set of principles and rules which can be summed up as follows:

• All monies paid through the employers payroll and identified on payslips count towards earnings for the minimum wage
• National Insurance will only be due if a specific contractual entitlement exists in respect of gratuities, or if an employer has directly or indirectly allocated the gratuities to their employees.

The Publican ​asked Peter Davies, Hospitality Tronc specialist with tax specialist Vantis, to analyse what this means in practice.

Peter writes : ​

HMRC has now conceded that it is perfectly proper for an employer to appoint a troncmaster and that no approval, or consultation, from employees is required. An employer cannot instruct a troncmaster as to the mechanism to be used for calculating the tips, but for the first time it is explicitly stated that an employer may offer advice, make suggestions, or put proposals to a troncmaster.

Provided that the troncmaster (and the tronc committee, if one exists) genuinely and freely decide independently that they wish to adopt those suggestions, then that is perfectly acceptable. This is a major step forward, but businesses should ensure that contemporaneous written notes and records are retained.

As to who can undertake the role of troncmaster, again HMRC is specific. It cannot be "the employer, business partner or official of the company (for example, a director)". This has never been in dispute, but we can finally put to bed those concerns that a senior or middle-level manager might be somehow deemed by HMRC to be "the employer".

The new E24 specifically accepts the concept of a single-payroll system where an employer distributes tronc on behalf of a troncmaster. HMRC does state that any business operating such a system should "contact their local HMRC office". However this is not required by legislation and there are no penalties for failure to make such contact. Given this seal of approval and the obvious benefits to employer, employee and troncmaster of a single-payroll system, all hospitality businesses would be well advised to move towards such a system immediately.

The fundamental change from E24 Mark 2 remains, namely that discretionary service and non-cash tips belong to the business and that a business may retain so much of those monies as it sees fit. Only the balance which is passed to, or made available to, the troncmaster constitutes the tronc. So retentions for credit card charges, breakages, administration and so forth are acceptable and do not compromise the NIC-free status of the tronc.

Moving on to employment contracts, HMRC confirms that a general right to participate in the tronc, with no amount specified, is acceptable. Where an amount of tips, or inclusive of tips, is specified then only that amount is subject to NICs and not any amount of tronc paid over and above that specified amount.

Finally, there is the National Minimum Wage (NMW). For HMRC this, one suspects, is the bitterest pill of all to swallow. NMW is confirmed as not being a contractual obligation for the purposes of NICs and the guidance sets out clearly that a business may pay a salary below the level of NMW.

If tronc money is paid via the employers payroll, and demonstrably allocated independently, then National Insurance Contributions (NICs) will be payable only on the salary element and NMW is satisfied. HMRC does not accept (although the legislation is ambiguous and legally untested) that monies paid via a separate tronc payroll may be counted towards NMW. If nothing else, this will be sufficient to persuade many businesses to move towards the single-payroll system.

It is clear that HMRC feels that such a system breaches the spirit, if not the letter, of NMW. Concerns remain that employees who pay no National Insurance will ultimately find their entitlement to benefits and state pension eroded. The lesson that HMRC appears finally and reluctantly to have understood is that interpretation of legislation can only go so far and that maybe, just maybe, they were wrong and industry was right all along.

Lessons for the Industry​

It's true that many troncs historically were operated poorly and that record keeping was, in many cases, non-existent. Many troncs were operated in smoke filled rooms using antiquated systems that rewarded a few disproportionately to the detriment of other staff.

Strangely enough, HMRC's retreat may well have ensured just a bit more transparency and fairness for many troncs and allowed them to operate as they truly should - as a reward, motivation, and incentive system for staff to provide excellent service.Let's not forget, this is why the customer paid the gratuity in the first place.

Pubs which have paid National Insurance (NI) on tips distributed to staff through their wage packet could be entitled to a refund. The taxman has invited food pubs and restaurants to reclaim NI after finally admitting defeat on a policy of treating tips as part of staff salaries for tax purposes.