It's a retreat the likes of which hasn't been seen since Napoleon decided that Moscow in winter was somewhat chilly. After months of soul searching, legal advice, re-writes, rumour and speculation, the latest version of E24 (Mark 3) has finally been published.
The HMRC's attitude to the rules and regulations, the legislation, National Insurance and the Minimum Wage has almost completely changed. You might be forgiven for thinking that Operation Gourmet had never happened.
Gone are the twists and turns of the original E24 and in comes something which leaves no room for ambiguity, confusion, and uncertainty. Instead, we have a clear set of principles and rules which can be summed up as follows:
- All monies paid through the employers payroll and identified on payslips count towards earnings for the Minimum Wage
- National Insurance will only be due if a specific contractual entitlement exists in respect of gratuities, or if an employer has directly or indirectly allocated the gratuities to their employees.
No, that really is it. It is as simple as that. But what does this mean in practice?
HMRC has now conceded that it is perfectly proper for an employer to appoint a troncmaster and that no approval, or consultation, from employees is required. An employer cannot instruct a troncmaster as to the mechanism to be used for calculating the tips, but for the first time it is explicitly stated that an employer may offer advice, make suggestions, or put proposals to a troncmaster. Provided that the troncmaster (and the committee, if one exists) genuinely and freely decide independently that they wish to adopt those suggestions then that is perfectly acceptable. This is a major step forward, but businesses should ensure that contemporaneous written notes and records are retained.
As to who can undertake the role of troncmaster, again HMRC is specific. It cannot be "the employer, business partner or official of the company (for example, a director)". This has never been in dispute, but we can finally put to bed those concerns that a senior or middle-level manager might be somehow deemed by HMRC to be "the employer".
The new E24 specifically accepts the concept of a single-payroll system where an employer distributes tronc on behalf of a troncmaster. HMRC does state that any business operating such a system should "contact their local HMRC office". However this is not required by legislation and there are no penalties for failure to make such contact. Given this seal of approval and the obvious benefits to employer, employee and troncmaster of a single-payroll system, all hospitality businesses would be well advised to move towards such a system immediately.
The fundamental change from E24 Mark 2 remains, namely that discretionary service and non-cash tips belong to the business and that a business may retain so much of those monies as it sees fit. Only the balance which is passed to (or made available to) the troncmaster constitutes the tronc. So retentions for credit card charges, breakages, administration and so forth are acceptable and do not compromise the NIC-free status of the tronc.
Moving on to employment contracts, HMRC confirms that a general right to participate in the tronc, with no amount specified, is acceptable. Where an amount of tips, or inclusive of tips, is specified then only that amount is subject to NICs and not any amount of tronc paid over and above that specified amount.
Finally, there is the National Minimum Wage. For HMRC this, one suspects, is the bitterest pill of all to swallow. NMW is confirmed as not being a contractual obligation for the purposes of NICs and the guidance sets out clearly that a business may pay a salary below the level of NMW. If tronc money is paid via the employers payroll, and demonstrably allocated independently, then NICs will be payable only on the salary element and NMW is satisfied. HMRC does not accept (although the legislation is ambiguous and legally untested) that monies paid via a separate tronc payroll may be counted towards NMW. If nothing else, this will be sufficient to persuade many businesses to move towards the single-payroll system.
It is clear that HMRC feels that such a system breaches the spirit, if not the letter, of NMW. Concerns remain that employees who pay no National Insurance will ultimately find their entitlement to benefits and state pension eroded. The lesson that HMRC appears finally and reluctantly to have understood is that interpretation of legislation can only go so far and that maybe, just maybe, they were wrong and industry was right all along.
Let's not forget, this is why the customer paid the gratuity in the first place.
By Peter Davies, Investigations & Enquiries Manager
Vantis Tax Ltd