Confusion remains after further tronc revisions

09 March 2006
Confusion remains after further tronc revisions

Ever since HM Revenue & Customs launched Operation Gourmet three years ago - its unofficial crackdown on troncs - guidance for restaurant owners has been confused and unclear.

So news that the Revenue suddenly reversed its position on troncs at the end of February probably won't have surprised many restaurateurs.

Restaurants and hotels can apparently again use tips to top up salaries to the national minimum wage (NMW) of £5.05 without triggering national insurance liabilities.

It's the latest twist in a long saga that began when the Revenue launched Operation Gourmet and slapped six years' worth of back tax on companies it felt hadn't been interpreting the law correctly. One such person was Alain Lhermitte of Mon Plaisir restaurant in London's Covent Garden, who faced a demand for £400,000 and went out of business. Several changes later, it now seems restaurants will be able to reclaim millions of pounds.

While it's a victory for restaurateurs, staff are left on shakier ground.

The move may initially seem attractive to employees, whose take-home pay would increase as their national insurance contributions (NIC) fell. But their pension and state benefit entitlements could suffer in the long term. Similarly, with no salary set in stone, they could pay higher interest rates on mortgages and loans.

Martin Couchman, deputy chief executive of the British Hospitality Association (BHA), says: "The difficulty is that staff could end up being paid totally from the tronc without paying any NIC. Obviously, the Treasury and Work & Pensions departments will be unhappy about that."

Peter Davies, investigations and enquiries manager at tax consultancy Vantis, admits that employers who are finding it hard to keep up with the annual 7% increase in national minimum wage, or who simply want to improve their bottom line, may take advantage of the new ruling.

"For businesses it's good news; for employees it may not be," concedes Davies. "It's a case of a business balancing what it can afford to do and what it's obliged to do."

The fact that the Revenue has changed the law three times in as many years has also set alarm bells ringing. Richard Clarke, tax director at PricewaterhouseCoopers, says: "I wouldn't think anyone will do anything in a hurry. There will be no rush to reinstate topping up. If employers currently go through the payroll they will be reluctant to go back to tronc."

Dave Turnbull, regional organiser at the T&G union, advises that employees should make sure they're paid through the payroll to ensure that their NIC are paid. But therein lies another problem.

There's still haziness over whether tronc money can be used to top up wages at all. The Revenue has stated that any salary paid through a payroll is now counted as going towards the national minimum wage, but there's no definition of what constitutes "payroll". It certainly means an employer's payroll, but does it also mean a tronc payroll?

"Tronc paid by the troncmaster as opposed to the employer will escape NIC - but will it qualify for going towards the national minimum wage or not?" asks Davies. "Either the Revenue will say ‘this is our take on the law so challenge us', or Parliament will have to legislate on it."

Couchman is equally bemused: "It doesn't deal with the point of who pays the money. We aren't 100% clear. There's a lot more to it than simply whether you can top wages up out of the tronc," he says. "We can't be certain that this is the final word."

So it seems the industry should brace itself for more changes. The BHA has scheduled a meeting with the Revenue, which has promised more guidance, but that doesn't help businesses in the meantime.

Restaurateurs likely to benefit from reclaiming NIC have a mixed response. Chris Bodker, chief executive at Image Restaurants, says his company has put in a claim for NIC it has paid, but was told that there's ambiguity over whether individual employees can also make a claim.

Bodker says:" I'm jumping up and down with joy that after three years of costly debate in time and professional advice, we can claim back NIC," he says. "I'm not delighted at the prospect of more changes."

Mark Derry, chief executive of Loch Fyne Restaurants, says: "The vagueness of the Revenue's own interpretation makes compliance an absolute minefield. We're now in the crazy position where we will have to reclaim NIC payments we paid in good faith.

"It's mad. Restaurateurs all do different things when it comes to tronc because there's simply a lack of clear guidance. Every time you ask the Revenue a direct question, they give you a different answer."

With so much uncertainty, it looks suspiciously as if the Revenue has seen the fragmented restaurant industry as a soft target. Faced with such vagueness, one thing is clear - restaurateurs should consult an accountant or legal adviser before making any hasty decisions on tronc. Which is probably the best tip restaurants will get right now.

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