How will tronc ruling affect me?

03 July 2008
How will tronc ruling affect me?

With new tronc developments since the Annabel's ruling, employers need to know where they stand with paying their staff. Peter Davis of accountants, tax and business advisory group Vantis explains

The Problem

Following the Employment Appeal Tribunal's (EAT) recent ruling in favour of HM Revenue & Customs (HMRC) in the Annabel's case (Caterer, 19 June, page 8), businesses with rates of salary - excluding tronc, tips and discretionary service charges - below the national minimum wage (NMW) that have a troncmaster to whom they pass money to distribute will be deemed not to be meeting their NMW obligations.

The Law

If customers pay discretionary service charges (by whatever means) or add tips to a card transaction, then these become the property of the business.

MW regulations state that for a payment to an employee to count towards NMW, that payment has to be a payment of "the employer's money". The EAT has ruled that where a business passes money to the troncmaster, either in cash or via a bank account that they control, then legal title of that money moves from the employer to the troncmaster. Therefore, when the troncmaster distributes money to their members, it is the troncmaster's money that the members are receiving and not the employer's. As such, it does not count towards NMW. Cash tips (excluding discretionary service charges paid in cash) never count towards NMW.

Expert Advice

While the EAT's judgment is likely to be referred to the Court of Appeal, businesses should take steps now to ensure that they do not breach the NMW regulations. HMRC is likely to take action against businesses immediately, rather than awaiting the outcome of an appeal.

Rather than pass the money physically to the troncmaster, a business should retain the proceeds of the tips/service charges in its own bank account. After deciding what proportion of that money will constitute the tronc, the business should advise the troncmaster of the amount of money which they can allocate.

The troncmaster should then make their decision and make a formal request to the employer to distribute the money in accordance with their wishes. The employer should then distribute money at the same time as wages and show the distribution as a separate item on the same payslip. This will retain the exemption from national insurance contributions (NIC) and, provided the aggregate total of salary and tronc exceeds NMW (currently £5.52 per hour for persons aged 22 and over) then all NMW obligations are met.

This system also relieves the troncmaster of the requirement to be registered with HMRC and all of the legal obligations that come with it. The employer operates deductions of income tax using the code number they already hold (meaning that there is no overpayment of tax at the year end or, for employees earning a totalof more than £38,000 a year, no underpayment of tax either).

The business makes one payment direct to employees to include salary (net of tax and NIC) and tronc (net of tax). Only one payslip and one PAYE registration is required. The business does not need to distinguish between salary tax and tronc tax when making its monthly payment or when completing its annual return.


Businesses that retain separate tronc payrolls and hand monies to the troncmaster to distribute must ensure their salary rates alone are in excess of NMW. Additionally, records must be kept to show the hours worked by employees HMRC is unlikely to believe, for example, that kitchen staff at top restaurants work only a 40-hour week.

Any business deemed to be in breach of NMW rates will be issued with an order requiring repayment of the shortfall to all current and previous employees covering the preceding six years. As and when these monies are paid, employer NIC will be due - adding another 12.8%. And if HMRC believes any failure was "wilful", it can impose financial penalties on a business and even and, in the very worst cases, prosecute owners or companies.


Peter Davies, Vantis 020 7417 0417

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