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In February 2006, HMRC withdrew its guidance booklet E24 Tips, Gratuities, Service Charges and Troncs: A guide to Income Tax, National Insurance contributions, National Minimum Wages issues and VAT following a change in its interpretation of the NICs rules on the payment of gratuities that form part of contractual pay or that are used to meet obligations under National Minimum Wage (NMW) legislation.
The booklet was later reissued, but with the NICs section omitted. This version of the booklet is included on HMRC's Employer CD-ROM 2006.
In April 2006, HMRC published an article in Tax Bulletin 82 entitled "Tips, Gratuities, Service Charges & Troncs - The NICs Position". For a payment to be disregarded for Class 1 NICs purposes, the Social Security Regulations require that it must be a tip, or a payment in respect of a tip, and either
- it must not be paid, directly or indirectly, to the employee by the employer and does not comprise or represent monies previously paid to the employer, or
- it must not be allocated, directly or indirectly, to the employee by the employer.
As we reported in a news item at the time, the article explained that HMRC had changed its view in two specific areas:
- With regard to the NMW, HMRC's previous position was that any payment that counts for NMW purposes cannot be disregarded for Class 1 NICs. As the legislation does not set such a condition, HMRC's view now is that, as long as these statutory conditions are met, the NICs disregard applies whether or not the payment counts towards the NMW.
- With regard to contractual payments, HMRC's former view was that, if a payment is contractual, it cannot be gratuitous and, therefore, cannot be a tip. The approach now is that, as long as the contract does not provide an entitlement to a specific amount from the tronc and the statutory conditions are met, the payments are still tips and not liable for NICs.
Booklet E24 has now been reissued with a new NICs section that reflects HMRC's revised approach to these two issues. The following examples are selected from the many included in the new booklet to illustrate the changed interpretation of the rules.
- Example 8: John, the proprietor of a restaurant, agrees with his employees a minimum amount each will receive in tips. He promises to make up any shortfall if the tips do not reach the minimum amount when he distributes all the tips at the end of each week.
Where John has to make good his promise he is meeting a contractual obligation out of his own pocket and as these payments are neither 'tips' nor 'in respect of' tips, NICs will be due on the payment.
Where John does not have to make good his promise the payments he makes derive from the tips paid by the customers, so are payments in respect of tips.
John satisfies neither of the conditions for exemption because he decides how the tips would be allocated and pays the amounts to the employees. So, NICs are also due on these payments.
Example 14: Ping, the proprietor of a restaurant, agrees with his employees a minimum amount each will receive in tips from the tronc. At the end of each week the troncmaster tells Ping whether a top up payment is required to ensure that the employees receive the minimum amount of tips.
Ping has a legal obligation to make contractual payments to the extent he makes any top up payment. The existence of the legal obligation prevents top up payments from being a tip. Nor are they payments in respect of tips.
NICs are also due on the minimum payments derived from tips if Ping directly or indirectly allocates those payments.
If employees receive amounts from the tronc that exceed the minimum amount and Ping does not directly or indirectly allocate those payments, no NICs will be due on amounts paid in excess of that minimum.
Example 16: Miguel, the proprietor of a restaurant, pays his staff an hourly rate that is less than the NMW rate that they are entitled to. Tips are pooled and paid through a tronc run by Conchita, the troncmaster elected by the staff. Conchita decides who will participate in the tronc and how much each tronc member will get. Miguel is not involved in the allocation of the payments from the tronc.
Conchita is responsible for operating PAYE on distributions from the tronc. At the end of every week Conchita passes a payment from the tronc to Miguel with a schedule detailing the gross tronc distribution in respect of each tronc member and the net amount that should be paid to each tronc member by Miguel. Miguel pays the net tronc monies to tronc members through his payroll with their wages, and shows the amount from the tronc on their payslips. Miguel checks that the amounts for payment from the tronc with the wages he pays through his payroll are at least equal to the NMW.
The source of the payments made from the tronc are tips paid by customers so the payments are in respect of gratuities. As Miguel is not involved in the allocation of the payments from the tronc there are no NICs due. If the payments from the tronc were not sufficient to bring the worker's pay up to NMW rates, then Miguel must make payments up to the NMW. These top up payments are not tips nor in respect of tips, so NICs will be due on any top up payments he makes.
The fact that a payment is taken into account for NMW purposes does not determine the question whether the payment is liable for NICs. A payment can count for NMW purposes but still be exempt from NICs.
Other matters clarified in the new booklet are that
- the independent status of a troncmaster is not jeopardized if
- the troncmaster is appointed by the employer without the approval from, or after consultation with, employees, or
- the employer may make suggestions to the troncmaster about the operation of the tronc as long as the troncmaster makes the decisions independently of the employer.
- instead of operating a separate payroll for the payment of tips, the troncmaster may pass the payments to the employer for processing through the employer's payroll system, effectively using the employer as a payroll agent. However, the troncmaster's PAYE scheme is separate from the employer's PAYE scheme and must be processed independently.
...UK Payroll News - Latest
Sources:
E24 - Tips, Gratuities, Service Charges and Troncs
Tax Bulletin 82 |
For Payroll and Human Resource Professionals
