As HM Revenue and Customs announces amendments to National Insurance rules on the taxation of tips distributed through a tronc, Chris Gent from London based Wilder Coe Chartered Accountants, looks at the current situation for hotels.

In December’s issue of Hotel and Business, I explained the rules regarding the tips distribution scheme know as a tronc. Now just a few months later the rules are set to be revised and hotels need to ensure they are prepared for the changes which relate to contracts and mandatory tips.

Troncs are basically separate payroll systems used by hotels and restaurants to distribute tips. They represent an arrangement for pooling tips that are then shared between employees who registered to become tronc scheme members.

Essentially any amount paid to an employee that is a gratuity can be exempt from National Insurance Contributions (NIC), if certain conditions are met and the tips are handheld correctly. Forming a tronc scheme is a common way of meeting these conditions as under the scheme, the employer will not allocate tips, directly or indirectly to the employee.

In a recent announcement, HM Revenue and Customs admitted that legal advice it had received indicated that employers should not pay NICs on payments made to employees from employee administered troncs, even if entitlement to a share of the tronc was part of the employment contract.

This change will amend the booklet “E24 Tips, Gratuities, Service Charges and Troncs”, which has now been temporarily withdrawn.

The relevant sections of the Employer’s Further Guide to PAYE and NIC booklets (CWG 2005 and the 2006 version) are now also invalid along with the on-line publication “Expenses and benefits in kind, a guide to tax and NICs”. All of these will now be updated and hotels should ensure they receive new copies.

Unfortunately the situation is currently in a state of limbo and hotels need to await the new edition of E24 before anyone can be sure of the rules.
The rules regarding troncs have been an ongoing saga and have always caused confusion for hotels and restaurants. In February 2005, Revenue and Customs agreed that employers could deduct card handling charges or credit card charges from tips received from customers before passing on the balance to the tronc. It had previously held the view that this amounted to employer interference with the tronc, and so would have made the entire tronc subject to NI.

It is hoped that the new rules will also help clear up discrepancies regarding the treatment of tips paid via troncs and the National Minimum wage regulations. The regulations state:

“Only tips, gratuities or service charges which are paid to the worker through the payroll count towards national minimum wage pay. Tips and gratuities that are paid directly to the worker by the customer and kept by the worker do not count. If tips are gathered and then redistributed by a ‘troncmaster’ (even if this is the employer) that money will not count towards the national minimum wage.”

Employers who feel they may be due a refund will be contacted by the Revenue and Customs. Those who believe they have been incorrectly accounting for NICs on their troncs as a result of this change should contact National Insurance Contributions Office Refunds Group (Employers Team), Room BP 1001, Benton Park View, Newcastle upon Tyne, NE98 1ZZ.

Or for more information contact me at Wilder Coe on 020 7724 6060.