The Inland Revenue has published a new version of booklet E24 Tips, Gratuities, Service Charges and Troncs, following discussions with industry representatives. The adjustments in the guidance provided relate only to NICs, not to tax or VAT.

The distribution of tips by a troncmaster is exempt from Class 1 NICs where the following two conditions are met:

1. it is not paid, directly or indirectly, to the employee by the employer and does not comprise or represent monies previously paid to the employer by a customer
   
   
2. it is not allocated, directly or indirectly, to the employee by the employer.

The particular areas where the rules have been clarified are:

• any tips that are used by the employer to count towards national minimum wage (NMW) compliance must be paid through the employer's payroll and are therefore subject to NICs
  
  
• conversely, any tips that are paid and taxed by the troncmaster, in circumstances where the conditions for NICs exemption are met, cannot count towards the NMW
  
  
• any tips that must be paid to employees under contractual arrangements cannot meet conditions for the NICs exemption
  
  
• where only a part of the amount of tips distributed is contractual, the non-contractual amount may be paid by the troncmaster without deducting NICs if the exemption conditions are met.

Example

An employer agrees that employees will receive a defined minimum in tips; any shortfall will be made up by the employer.

• The amount up to the defined minimum is a contractual payment and is subject to NICs by the employer. The amount paid to the employees counts towards the NMW.
  
  
• If the employer distributes any tips that exceed the minimum, the exemption conditions are not met and payments are subject to NICs by the employer. The amount paid to the employees counts towards the NMW.
  
  
• If any tips that exceed the minimum are not directly or indirectly allocated by the employer, the troncmaster may distribute them without any liability for NICs. The amount paid to the employees does not count towards the NMW.

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...back to 11 February 2005

Sources:
www.inlandrevenue.gov.uk/employers/tips-gratuities.htm