Service Charges Tips/Gratuities

What is a service charge?

• It is added to the customer’s bill before being presented to them.
• It could be either discretionary or mandatory.
• For it to be discretionary it must be made clear to the customer that it is a voluntary contribution (e.g. reflected on the bill).

Mandatory Service Charges (MSC)

• VAT at the standard rate should be charged on a MSC.
• Pay As You Earn (PAYE) tax and national insurance (NI) should be incurred on any payments out to employees, irrespective of what arrangements the employer has put in place.

Discretionary Service Charges (DSC)

• No VAT should be charged.
• For tax and NI purposes it is deemed to be a tip.

What is a tip/gratuity?

• It is an uncalled for, voluntary payment by a customer.
• It can be a DSC.
• No VAT should be charged as it is a voluntary payment.
• It is liable to an income tax charge.
• It depends on the circumstances whether or not NI is due.

How does a tip/gratuity avoid NI?

• One of the two following conditions must apply.
• The tip is not paid, directly or indirectly, to the staff member by the employer and does not represent monies previously paid to the employer, for example, by the customers.
• The employer does not control, directly or indirectly, who receives the tip and the amounts involved.

Examples where this could apply

• If a tip is made direct by the customer to the employee and they keep it solely for themselves.
• The employee, not the employer, is therefore responsible for notifying HMRC about the tip in this case.
• Where a tronc scheme (TS) has been set up and the employer has no direct or indirect involvement in it.

What is a tronc scheme (TS)?

• A TS is a special arrangement to pay out tips
• It is the employer’s responsibility to notify HMRC when the tronc was created and who the troncmaster (TM) is.
• HMRC will then set up a TS PAYE scheme.
• A business can have more than one TS. E.g. one for the hotel restaurant staff and one for the remaining employees.
• The TS records must be kept separate from the main business payroll and any other TS.

What about the TM?

• The TM could be an individual within the business or a third party.
• They deal with paying out the tips to the employees (tronc members).
• They deduct the tax and are responsible for paying it over to HMRC.
• A TM must accept the role and be aware of the responsibilities of it.
• Failure to operate PAYE correctly could result in the TM having to meet any outstanding tax liability personally.

How is NI avoided if paid through the TS?

• The payment must not originally derive from a MSC.
• The employer, or somebody closely connected to them, should not be the TM.
• The employer must not directly or indirectly influence the TM on who should receive a pay out from the tronc or how much they should get.

An example of indirect influence

• The employer collects all the tips (cash/credit/debit card/app) and passes them to the TM.
• The employer has devised a points system based upon length of service and seniority.
• The TM has to follow the points system when paying out the tips.
• Tax and NI are due on those tips.
• The employer and not the TM is responsible for accounting for the NI through the business payroll.

HMRC potential questions re a tronc

• When was the tronc set up?
• Who is the TM?
• Is the TM connected to the employer?
• Is the TM fully aware of their responsibilities?
• Who are the tronc members?
• How are the monies paid across to the tronc?
• Are there any MSC paid across to the tronc?
• Is there a tronc bank account and who controls it?
• Who decides on the level of tips to be paid out and to whom?

If you wish to discuss service charges, tips/gratuities or other issues please do contact us.