Court of Appeal judges are mulling over a challenge by upmarket Mayfair nightclub Annabel's to an Employment Appeal Tribunal (EAT) decision last year that tips cannot be counted as a contribution to making up the National Minimum Wage.
The club's advocate, Timothy Brennan QC told the court that Annabel's tips system benefited employers, customers and staff, and that the issue was important to hospitality and other sectors where tipping was commonplace.
He argued that under the so-called tronc scheme - an industry term for a centrally-organised tips system - employees and employers are not obliged to pay certain National Insurance contributions. Also, customers benefited as tips were not subject to VAT.
HMRC (Revenue and Customs) won an EAT ruling last June that a tronc scheme was unlawful and money paid through it should not count towards the minimum wage as it was not paid directly to employees as wages.
Also, tips shared through a tronc scheme were not subject to VAT and National Insurance contributions payments - thus depriving HMRC of revenue.
The EAT was told that all the Annabel's staff involved earned above the minimum wage and some were higher-rate tax payers.
Judgment has been reserved to a later date.
The Government is currently consulting on tips having vowed last year to close the legal loophole that allows employers to top up minimum wage via non cash tips.
By Chris Druce
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