From time to time, HMRC turns the compliance headlight on a particular business sector. This year, they are scrutinising restaurants and takeaways. In particular, staff tips at work are currently one high-risk area.
There are various ways in which tips at work can be distributed to staff. Discretionary service charges and tips paid by credit card should be dealt with under the PAYE scheme.
How tips at work are treated for National Insurance Contribution (NICs) purposes, is what causes dilemmas for employers. There is an exemption which means that NICs are not always due on tips. This can be advantageous for both business and employee.
For the exemption to apply, the tip must satisfy either of these two conditions:
- it is not paid by the employer to staff, directly or indirectly, and does not represent monies previously paid to the employer, say by customers, or
- it is not allocated by the employer to staff, either directly or indirectly.
The first condition can only apply where employees keep cash tips received by them directly or from an informal pooling arrangement. For the second condition, the allocation is essentially about deciding who receives what. The exemption can thus apply if a specified employee, (often a troncmaster), rather than the employer, decides how the tips are distributed to staff. NICs will be due, however, where tips are allocated to employees directly or indirectly by the business.
Do you want more advice on how your tips at work are taxed?
HMRC has produced a flowchart which may prove useful. For more information about how we can help you please see here.
Contact Derek Boughton on dboughton@ellacotts.co.uk or 01295 250401 who will help to decide the best ways to either distribute your employee’s tips or how best to allocate your own tips to ensure they are tax-efficient. Alternatively, you can contact us here.
