Finance & Funding

Tips, Gratuities and Tronc

Successfully managing tips, gratuities and tronc

Tronc is a French word that broadly means collection box

If you are involved in a business which receives tips you could end up in serious trouble with the Inland Revenue if the distribution of them is not handled correctly.  There are a number of different ways to handle tips, the pros and cons of each are discussed below.

Tips given directly to the employee

The simplest method of dealing with tips is for the customer to tip the employee directly.  The employee is then responsible for the tax liability on his or her own self-assessment tax return.  However, most employees don't make an individual tax return, so instead the Inland Revenue will estimate the amount of tips the employee is likely to get, and will adjust their tax code accordingly so tax can be deducted through your normal PAYE.  No National Insurance Contributions (NICs) are payable on these tips.

However, if tips are pooled into a collection box matters get far more complicated.  There are several possible scenarios:

Tips are pooled and the employer manages the tip pool

In this instance, all tips are put into a collection box and distributed by the employer.  In this case the tips should be added to each of the relevant employees' wages and PAYE deducted in the same way as normal weekly/monthly wages.  Both tax and NICs are due.

What if the tips are paid by cheque or credit card?

If the tips are included in the overall payment which is made by cheque or credit card, and the business owner decides to pass the tips onto the employees, they must operate PAYE on these payments as part of the normal payroll.  Both tax and NICs are due.

Tips are pooled and someone other than the business owner (or director) manages the pool (tronc and troncmaster)

In this instance, all tips are pooled and someone other than the business owner (or director) is responsible for distributing the tips.  This is called a tronc and the person responsible is the ‘troncmaster'.  The business owner is responsible for advising the Inland Revenue each time the troncmaster changes, and the troncmaster takes on responsibility for managing tax on the tips.  They are also personally liable for any failure to pay tax.

Example 1
Gordon owns a restaurant and allows the staff to keep all the tips.  He also passes on to them the tips paid by cheque and credit card.

Jean Paul is the restaurant manager and offers to collect the tips and distribute them to the other staff on a weekly basis.  Gordon has no involvement in this at all.

Jean Paul is running the tronc and is therefore the troncmaster.

It is Gordon’s responsibility to inform the Inland Revenue that Jean Paul has been appointed the troncmaster.

Jean Paul is now responsible for operating PAYE in the normal way on payments made from the tronc.  Failure to do so may make Jean Paul personally liable for any PAYE due but not paid.  He can use the business’ PAYE (they are effectively offering him a payroll service) but records on the tips must be kept separately from the general payroll.

National Insurance Contributions (NICs)

Of course nothing is simple, so how do you stand as regards national insurance on tips?  Generally speaking, if the owner manages and distributes tips, then NICs are due.  If all the tips are allocated by the troncmaster, and the owner of the business has no involvement at all – they are not involved in distributing tips or deciding who gets what - then no NIC s will be due.

Careful!
If the business owner has any say, even indirectly, in how the tips are collected or allocated, then NICs become payable.

Example 2
Gordon the owner promises the head chef £200 out of the tips each week and passes the balance of the tips to Jean Paul to allocate amongst the staff.

As Gordon has become involved with the allocation of the tips, the £200 paid to the head chef will be subject to NICs.  The rest of the tips are not subject to NICs as Gordon has no say on the allocation.

On the other hand, if Jean Paul decides to allocate some of the tips to the head chef, without being told to by Gordon, then they are not subject to NICs.

Example 3
Gordon the owner requires Jean Paul to adopt a points system that he (Gordon) has devised.

Gordon is therefore indirectly allocating the tips because John Paul is following his instructions. NICs become payable.

However if Jean Paul and a staff committee decide themselves to adopt and use the points system and are not instructed that they must do so, then NICs will not be payable on the tips.

As from 1st October 2009

Please not that as from 1st October 2009 tips and gratuities cannot be used to make up wages to National Minimum Wage levels.  All employers must pay employees at least National Minimum Wages, then tips and gratuities may be distributed in addition to this. 

For more information

For more about tips, gratuities, service charges and tronc, see this publication from the Inland Revenue: http://www.hmrc.gov.uk/helpsheets/e24.pdf