The news that HM Revenue & Customs (HMRC) has backed down and changed its mind – for a second time – over the issue of troncs, the minimum wage and national insurance contributions (NICs) has been widely welcomed by the hospitality industry. But have we now heard the last of the changes?
The Revenue cracked down on restaurant tronc schemes three years ago with Operation Gourmet. Companies faced demands for as much as six years of back tax, and many were driven out of business as a result.
But, this February, the Revenue conceded it had misinterpreted the law.
So what exactly is the law as it stands today?
HMRC now says that as long as tronc money is distributed by an independent troncmaster, it can be used to top up wages without paying national insurance. There are only two circumstances in which an employer will be liable to pay this on tronc money.
First, if a business allocates the tronc itself, then NICs will be due. This has never been disputed. Such allocation could be specific – such as deciding that a specific person will receive a specific amount – or a more general instruction.
The second circumstance leading to NICs will be if a contractual entitlement to a specific amount of tronc exists. Other than these two situations there is no national insurance on tronc money, full stop.
So can I now legally use tips to top up the national minimum wage?
Yes. HMRC has now conceded that, under the present legislation, no automatic link between the minimum wage and NICs exists, and tips paid through the employer’s payroll to top pay up to minimum wage levels, without the operation of NICs, is acceptable.
What is still legally unclear is whether or not tips paid through a separate payroll operated by the troncmaster count towards the minimum wage. In the absence of definitive advice from HMRC, it would be wise for all businesses to arrange to pay their tips to staff via their own payroll.
If I’ve paid NIC arrears and fines as a result of an Operation Gourmet investigation, am I entitled to a rebate?
Hundreds, and possibly thousands, of businesses will have paid over NICs, interest and penalties under the Revenue’s now-infamous Operation Gourmet. All may be in line for a refund, together with compensation for those professional fees incurred in disputing the original – and now discredited – claim.
How should I go about getting a rebate?
Businesses should use their accountants or professional advisers to make the claims on their behalf and to handle the inevitable defensiveness and nit-picking that HMRC is bound to adopt in response.
It will come as no surprise that individual tax officers have not been given the freedom to write out cheques. All claims for refunds are being looked at by the Revenue’s policy makers at central office.
Attempts by HMRC to reopen concluded inquiries in the hope of finding other problem issues should be strongly resisted.
Equally, however, businesses need to be realistic and honest. If the issue at stake previously was, say, control of the tronc by the company directors, then a refund claim will probably be a waste of time at best and, at worst, a prompt for a further inquiry.
Will small companies miss out?
Charlie Thellusson, managing director of Red Olive Catering in Derby, feels that the potential tax break afforded by NIC-free gratuities is virtually impossible to access for businesses such as his.
“The Revenue rules state that the tronc scheme has to be run by someone who is not the owner of the business,” he says. “As sole owner, director and head chef, I run the whole establishment and employ waiting staff. There is simply not an employee on our books who we could reasonably expect to take on the task of running the tronc.”
Thellusson thought he might have found an answer by asking Pay Academy, the payroll administrator that runs Red Olive’s PAYE scheme, to run its tronc too.
But to remain within the law, Niki Caister of Pay Academy explains: “We would have to take our instructions from someone other than Thellusson – and this is the problem he has rightly identified. What businesses like Red Olive need is a simple, workable solution to the issue of remitting tips, which reduces rather than increases the administrative burden.”
The Revenue is not a good loser, and it is indeed rankled by having to make such a public climb-down and accept loss of face. Rumours are very strong that new legislation will shortly be introduced regarding troncs. As yet, it is unknown what this new legislation will say. The worst possible scenario is that the NIC exemption for gratuities will be abolished completely.
This would be a major step for the Government to take, and one which would have the effect of pushing up prices for customers.
What is more likely is that legislation will be introduced to return us to the situation we were in a few weeks ago (the “E24 Mark II”), whereby NICs would always be due on at least the minimum wage payment, regardless of how much of that payment was wages and how much tronc.
As ever with troncs, the message is: “Watch this space.” We haven’t seen the last of the changes yet.
Peter Davies is investigations and inquiries manager at business and tax adviser Vantis.
The current law on tronc
- Tronc money paid through the main payroll can count towards the national minimum wage.
- Tronc money used to top up the level of pay will not automatically be subject to NICs.
- Pay rates (before counting tronc through the payroll) may be set below the minimum wage
- NICs will be due if an employer directly allocates gratuities to its employees.
- Directors, proprietors and partners cannot act as troncmasters.
- NICs will be due if the contract of employment specifies an amount, or minimum amount, of tronc to be received.
Keep your staff benefits tax-free
After the climb-down over troncs, HMRC might target the treatment of benefits in kind. Most benefits are exempt from tax, but it’s important for employers to know exactly where the Revenue stands.
If meals are provided in the restaurant at a time when meals are also served to the public, then part of the restaurant needs to be designated for staff only, and all staff meals must be taken in that part.
Otherwise, the Revenue will seek to charge tax on the cost to the employer of providing meals.
For clothing to be accepted as “uniform” and therefore be tax-exempt, it needs to be of a type not suitable for normal wear outside work, such as a jacket with epaulettes. If other clothing is provided, such as a white shirt and black trousers for waiting staff which could equally be worn outside work, this qualifies as being taxable.
Late-night transport is exempt from tax only under the following conditions:
- If the employee works later than usual and until at least 9pm, and such occasions occur irregularly; and
- By the time the employee finishes work, public transport has ceased or it would not be reasonable to expect the employee to use it; or
- Car-sharing arrangements with another employee have failed due to unforeseen circumstances.
Where the above conditions are met, only the first 60 taxi journeys home will be tax-free.
In light of the above, if you feel that you are providing a taxable benefit, it should be reported to HMRC on form P11D at the year end (6 July at the latest).