Understanding tips and troncs
Tips are usually voluntary payments made to employees by a customer; tips are paid voluntarily and are not required as per the customer’s receipt, and so there is no VAT to be paid on these. If an organization includes a service charge on their invoices or receipts, which a customer is expected to pay, then these are not classed as voluntary payments and VAT is applied at a standard rate.
Tips can be paid by card, cheque or cash; the treatment of the tips relies on the involvement of the employer in the deciding of which employee is paid what amount. If the employer shares the tips out themselves or has some employees with a minimum tip receivable written into their contract, then the tips will be liable to PAYE tax and national insurance contributions.Tips can be pooled together by each employee into what is called a tronc, and a troncmaster will be chosen to oversee the tronc. The troncmaster can be anyone who isn’t the employer. The troncmaster is responsible for ensuring the correct taxes are paid on the tips that are divided out among the employees. The type of taxes to be paid depend on the employer’s involvement in deciding the tips share between employees.
Tips that were paid by credit or debit cards or cheques can be paid to the troncmaster by the employer, like how each employee would pass their cash tips along at the end of the day. If the employer retains no influence over how these tips are shared, they would not be liable to national insurance contributions but they would still be liable for PAYE tax via the tronc payroll. The troncmaster would need to use a tronc PAYE scheme in the troncmaster’s name to ensure reports are sent to HMRC, and the troncmaster will be responsible for paying the PAYE tax. The employer can inform HMRC of the appointment of the troncmaster and HMRC will then set up to the payroll for the tronc.
There may be a situation where a troncmaster may decide to restrict who can participate in a tronc membership such as allowing employees who have worked at the establishment for more than so many months. The employer can inform the troncmaster if they believe the membership should be open for the excluded employees and thus influence the participation, but as there is no influence on the allocation of tips from the employer the tips are still exempt for national insurance. In situations where there is a minimum agreed tip amount to be received by an employee in a contract, the employer must pay the national insurance on that amount and pay it across to the employee; the tips here can be taken from the tronc, and must occur before the rest of the tronc is divided up. It may be that someone else, not the employer or the troncmaster, decide how the tips are shared. The tips here would not have national insurance to pay on this.Tags:
tips, tronc, troncmaster, PAYE, Tax and Ni