The tip of the iceberg?
More than two years after a ban was first proposed following an official review, last week Theresa May announced plans to ban restaurants from withholding a proportion of tips that are left for waiting staff, giving insight into what might be addressed in the Budget on 29 October, or indeed any ensuing legislation.
The original review was led by the then business secretary, Sajid Javid, who recommended that all tips went to workers, not their employers. At the time, Mr Javid said the Government would consider whether to reinforce the existing voluntary code or legislate.
At the time, several restaurant chains had been taking advantage of the failure of the Government to impose legislation: TGI Fridays had been reported as withholding 40% of card tips to waiting staff in order to redistribute them to kitchen staff in lieu of a pay rise; Pizza Express had levied an 8% deduction on card tips to cover administrative costs, but the practice was revoked following much adverse publicity.
Most people would assume that waiting staff get the full share of tips. It is common for customers to make rewards for good service by either:
- Leaving some money on the table for the staff member that served them to pick up, or
- Add a voluntary gratuity to their credit card payment, or
- Pay a mandatory or suggested percentage as part of the bill, a service charge.
Cash tips are liable to Income Tax, and individuals in receipt of these tips must declare them on their self-assessment tax return. Where the individual does not complete a tax return, HMRC will estimate their tips based on information they provide, and information provided by their employer. The tax code will subsequently be adjusted such that Income Tax is collected through PAYE. There is no National Insurance on cash tips.
For tips included on card payments, where the employer pays these to the employee directly, the employer is responsible for ensuring Income Tax is paid through PAYE. It may be to this administrative process that employers believed some kind of charge was justifiable. Where the employer decides how the tip is shared out, National Insurance is due too.
A service charge, the latter of the three examples above, could cause some level of confusion as many may believe this is a form of tip. Service charges are added to the bill before it is given to the customer. If the charge is compulsory, there's no guarantee workers will see a penny of that service charge. It's often added to cover things like breakages and people doing a runner! If the service charge is paid out to workers it is treated in the same way as wages.
Customers may struggle with service charges or any retention by the employer of tips, as they may believe that any tip that is left is a reward for the good service that has been received and not for the restaurant. There is an expectation that the value of the quality of the food and drink is reflected in the price charged such that no further reward is required. Waiting staff are however, expected to be low paid and in need of the additional recognition that any tip is intended to reward them personally for.
Tips collected by employers and passed on to employees could be fully liable to tax and National Insurance, even when part of that is paid as a voluntary tip or gratuity by the customer. As stated earlier, the mechanisms adopted and the involvement of the employer has an impact on any tax and National Insurance treatment.
In some cases, a member of staff is involved in the collection and distribution of tips, acting as what is known as a Troncmaster. This can be advantageous for employees and employers as it can result in a larger proportion of the tip getting to the employees and the fact that National Insurance does not apply to tronc monies.
In light of the latest announcements, businesses will be under pressure to ensure customers are fully aware of what will happen with any service charge, tip or gratuity they leave so that they are able to make a judgement on the fairness of the restaurant’s system, ahead of any legislation. In addition, workers should understand and be able to explain the business’ policy on service charges, tips and gratuities to customers, or at least know where to direct them for further information. Clearly, the proposed new legislation will remove the need to do this.
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This Insight is part of exclusive content being provided by our experts on the run up to the Autumn Budget. View our special Autumn Budget 2018 coverage to read more commentary and upcoming analysis to help your business plan for any outcome.
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