Despite the media outrage, properly run tronc systems are as ethical as they are legal, says Peter Davies, employment tax director at WMT
This summer it's felt like the hospitality sector has been under almost constant attack. The skills shortage, the national living wage and no sign of any VAT reduction have all been clouds on the horizon for many operators. But the issue that has gained the most publicity has to be tipping and the way the sector deals with it.
Now let's be clear. There's no suggestion that anybody has broken any laws here. Those restaurants that have been ‘named and shamed' by newspapers such as The Independent and The Evening Standard have all acted perfectly lawfully, so far as I can tell. But the media, prompted by trade union Unite's campaign against PizzaExpress's admin charge, have moved the debate on from legalities to what they see as morally right or wrong.
As ever, when we move away from the law, things get confusing. Take discretionary service charges. These unequivocally belong to a business, not a waiter; but much of the media fails to draw the distinction between a tip and a service charge, just as they fail to distinguish between what is a wage (set out in an employment contract) and what is paid in addition to a wage.
More recently though, some comment has moved on from the merely controversial to the downright dangerous. Last week, a major newspaper chastised a number of high-profile businesses for not giving the service charge directly to staff, but for using a tronc system instead. Indeed, some journalists have described troncs as a tax scam, even though HMRC itself does not consider troncs as aggressive or tax avoidance schemes, so long as they are run correctly.
I'm not going to pretend that every tronc system out there is fair and ethically sound, but I genuinely believe the overwhelming majority are. But what's dangerous about some of the more recent comment is that what it chastises restaurants for is a legal requirement. Have we really got to the stage of 'naming and shaming' businesses for complying with the law?
To clarify: if you pay the proceeds of service charges and card tips to your staff, then you must ensure they are taxed at source - no ifs, no buts. If you decide who gets what, or you pay it as a part of a wage (over the level of the national minimum wage), then you and your staff will also pay national insurance; if it is paid through a proper tronc system, then it will be exempt from national insurance. Any restaurant that lets staff retain tips and service charges directly is going to run into a very big and costly problem with HMRC.
The government has recently announced a review of tipping practices in the industry. This is an opportunity to dispel a few urban myths and put right some of the ill-informed comment. It's a chance to ensure that the silent majority of businesses that run legal and ethical tronc systems are not subjected to an ongoing barrage of comment that tars everyone with the same brush, or have to face new legislation that would impose new tax costs on them, their staff and their customers.