Service Charges, Tips, Gratuities and Cover Charges
The basics – What is a Tip? What is a service charge?
HMRC defines a tip as “an uncalled for and spontaneous payment offered by a customer either in cash, as part of a cheque payment, or as a specific gratuity on a credit or debit card transaction”.
A customer may make different types of payment on top of the basic charge for the meal or service, but these may not necessarily be classed as a tip. The payments could be:
- a mandatory service charge
- a discretionary service charge
- a tip paid to the employer as part of a cheque, debit or credit card payment
- a cash payment paid into a staff box or similar arrangement
- a payment in cash left on the table.
A service charge is an amount added to the customer’s bill before it is presented to the customer. If it is pointed out to the customer that the charge is a discretionary amount and the customer is under no obligation to pay it, it is a voluntary service charge. If this is not the case, it is a mandatory charge.
Where mandatory charges are passed out to employees, NIC is always due on the payment, irrespective of what arrangements are in place for the sharing out of tips.
Is tax due on these payments and who is responsible?
All tips are taxable!
If the customer leaves a cash tip on the table or gives it directly to the employee then it is the responsibility of the employee to inform HMRC. The easiest way to deal with these types of tips and to help your employee keep on track, would be to advise them to call HMRC. They can inform them over the phone and they will automatically adjust for this through their tax coding. They can also enter the details direct onto their self assessment tax return if preferable.
With any other arrangement, including a tronc, the responsibility lies with the employer to deduct PAYE/NIC at the time they are paid out.
Tronc?
A tronc is an arrangement for pooling and distributing tips and service charges, the operator is known as the troncmaster and he is elected by his fellow employees.
For tips and voluntary service charges distributed by a tronc, PAYE tax is always due and it is the troncmaster's responsibility to calculate and deduct it. As long as the employer has no involvement in the allocation there is no obligation on the employer. A separate PAYE scheme is usually in place where a tronc is in operation.
NICs are exempt on payments of tips as long as you do not have a role in deciding which of your employees gets money from the tronc and how much each employee should get.
Can tips count towards the employee’s wage?
From 1 October 2009 it is was unlawful for employers to use any type of the above tips towards the payment of the National Minimum Wage As with all other circumstances where there is a failure to pay the National Minimum Wage, it could result in an enforcement notice being levied.