Hospitality: tips and tax

From time to time, HMRC turns the compliance headlight on a particular business sector. This year restaurants and takeaways come under scrutiny. Staff tips are one high risk area.

There are various ways that tips can be distributed to staff. Discretionary service charges and tips paid by credit card should be dealt with under PAYE.

It is however, the treatment for National Insurance Contribution (NICs) purposes which can cause dilemmas for employers. There is an exemption which means that NICs are not always due on tips, which 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 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, 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. The flowchart at the end of HMRC's guidance may prove useful, but please do contact us for further advice.