Cash-back for tips could leave staff with tax bill

The controversy over using cash-back to circumvent the tronc system continued this week as a leading industry tax consultant warned that employees could unwittingly be made liable for their own tax.

Tax consultancy Vantis warned that despite the recent victory for Hardy's restaurant against the Inland Revenue - enabling it to use the cash-back system for tipping - there were serious pitfalls associated with the practice.

Peter Davies of Vantis explained that the problems were three-fold.

If restaurants moved to the cash-back scheme, and closed down the tronc, the Revenue would not accept that customers had stopped tipping. Inspectors would assume that restaurant staff were getting the same money as before and expect them to pay their own tax by completing self-assessment forms.

The onus would have moved from the restaurant to individual staff members to keep track of their tips and declare them. "Does any restaurateur really want to see their employees placed in this position?" Davies said. "The Inland Revenue would not ignore an arrangement like this."

The tronc system is worth at least £1.5b a year to the Revenue, and Davies advised restaurants that they would probably face investigation if they adopted the cash-back system, because it should result in overall payments of PAYE and national insurance increasing.

"When this increase in the level of payment does not happen, the business can expect to be subjected to a compliance review," Davies warned.

He also raised concerns that when customers used their credit cards - rather than debit cards - to tip via cash-back, restaurants might run the risk of being blacklisted by the credit card companies for contravening their rules. This could result in services being withdrawn.

For customers using their credit cards for discretionary service, rather than taking cash-back, the restaurant would have to introduce a regular tronc system to deal with these tips if they were to be passed back to staff.

However, Nick de Bastarrechea, owner of London's Hardy's, was not daunted by these warnings, and said he would continue to use the system. He told Caterer: "I have a letter from the Revenue confirming that we can use a cash-back system for tipping as a replacement to the tronc scheme.

"We state on our bills and menu that we do not hold tips on credit cards on behalf of staff. We treat it in the same way as cash-back - what they do with that money is their business."

The revised Inland Revenue guidelines on tronc are due out next week.

Key points - Staff will be responsible for paying and declaring their own tax from tips

• Restaurants could be investigated if their PAYE and national insurance payments do not increase
• Customers may not want service charge put on their credit cards
• Credit card companies could withdraw their services from outlets that use the cash-back scheme.

Source: Caterer & Hotelkeeper magazine, 9 December 2004