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Tips, service charges and troncs

Are your arrangements future proof?

Andy Hamman, Director, Employment Tax
28/01/2020
People in cafe

The Queen’s Speech in October 2019 announced that new legislation would be enacted that requires 100% of tips and service charges to be passed to staff.

The ‘Employment (Allocation of Tips) Bill’ will mean that any business that accept tips and/or applies a service charge (primarily in bars, restaurants, hotels and casinos), will have to ensure that they pass these in full to their employees, typically by way of a tronc arrangement.

Currently, there are numerous variations on how businesses manage the distribution of tips and service charges, ranging from the very simple to the very complex. However, it is the issue of retaining amounts to cover administration costs, that has been the subject of much debate over recent years.

In many cases operators retain nothing, however some do withhold a small amount but some also retain significantly more. For those retaining amounts in the region of 5%, there is a reasonable argument that this is to cover genuine costs incurred (e.g. credit card commission and payroll fees). Such amounts do fall within the framework outlined in the 2009 Department of BIS voluntary code of practice and more recently in 2018, UK Hospitality’s own voluntary Code of Practice (backed by Unite).

So, does the sector need legislation? Most operators feel the sensible answer must surely lie in self-regulation and application of the codes of practice. However, it is clear that the government has concluded that this is not a trusted option and hence it now seeks to push ahead with the new bill.

We suggest there will be a number of considerations to resolve before any bill can be passed.

An obvious concern is if a business cannot cover its true costs in passing the tips/service charge to its employees, surely it will withdraw from the arrangements. Taking this a stage further, if the business refuses to be party to the arrangements, by default this places the responsibility for operating PAYE onto the troncmaster. If the troncmaster cannot then cover the costs associated with payroll, banking etc. (by deducting these from the tronc monies) there will be zero interest to take on the role. An alternative option could be a refusal to accept tips or apply a service charge altogether. In both scenarios, staff lose out on a significant element of their income and in turn, HMRC will face a severe reduction in PAYE tax receipts.

No timeline has yet been given as to the likely introduction of the legislation. We recommend that businesses that are currently making an admin retention use the time to assess the financial impact that the bill will bring.

For any further advice or should you require any assistance in ensuring you are operating a compliant, efficient and future proof tronc arrangement, please contact our specialist, Andy Hamman on 020 7842 5392. 

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Caroline Harwood
Caroline Harwood
Partner, Head of Share Plans and Employment Tax
London