As the temperatures have been rising in the garden so too has the temperature in the restaurants. HMRC has been targeting restaurants in their latest campaign to ensure everyone is paying their fair share of tax.
Restaurants and takeaways are often paid in cash despite the progress towards a digitalised world. HMRC see that as an area where business owners have the opportunity to try to declare less tax. HMRC are thought to be looking at how tips and service charges are operated as part of their focus on restaurants.
Tips apply equally to other service industries such as hairdressers, beauticians, massage therapists and taxi drivers. So let’s take a look at how the rules operate.
Tips, Service Charges and Gratuities
There are different ways in which staff receive tips; such as mandatory or discretionary service charges, gratuity paid to the restaurant as part of a cheque or credit/debit card payment, cash collected in a tips jar or cash handed directly to the staff.
If the amount is a service charge which is required to be paid then VAT is charged on that service charge. If the tip is freely given, in whichever format mentioned above, it is outside the scope of VAT. It won’t even appear on the VAT return.
Where the employee receives the tip directly from the customer the money is not dealt with via the PAYE by the employer. It is instead the employee’s duty to notify HMRC of the amount received. The tax due on those amounts is usually paid via HMRC adjusting the employee’s notice of coding.
If however the tips are paid to the employee by the employer or by a troncmaster then PAYE should be operated on those tips.
If there is a troncmaster, someone who collects and distributes tips between employees with no involvement from the employer, it is the troncmaster who is personally responsible for dealing with the PAYE scheme in relation to the tips. The employer must notify HMRC of the troncmaster arrangement. If the employer or a director of the company is the troncmaster or if the employer decides how the tips should be distributed or if there are mandatory service charges, the payments are dealt with via the employer’s PAYE scheme.
Who said tax was simple? The employer is still responsible for paying NIC in respect of tips and gratuities even if there is a troncmaster, who is not the employer, operating a PAYE scheme. That is because although some tips attract income tax they don’t always attract NIC. The rules differ!
Tips are free from NIC if they are either not paid to the employee directly or indirectly by the employer and do not comprise monies previously paid to the employer by e.g. customers OR are not allocated directly or indirectly to the employee by the employer. So if the tips are paid in the right way the employee can save money by not paying NIC on them.
National Minimum Wage
Amounts paid by the employer, from customers to the employee which are tips, service charges, gratuities etc. do not count towards the minimum wage pay.
Check that you are compliant
It’s a difficult one really. Do you let staff at front of house who receive the tips keep it all and then tax is their responsibility but bear in mind it doesn’t count towards the national minimum wage. That may be unfair to kitchen and other staff. Do you instead pool the tips and share them. If so you need to decide how you are doing it and who is doing it and ensure you comply with the reporting rules. You don’t want to face interest and penalties as well as tax liabilities. It soon mounts up. An Indian restaurant faced a £310,000 fine for defaulting on £413,000 of tax. Don’t forget HMRC are not restricted to one year of defaulting.
The information provided here is not advice, it is to illustrate that you need to look at how you operate tips very carefully. If you are a restaurant owner or a troncmaster seek advice if you are in any doubt about what to do.
If you are an employee and receive your tips in cash directly from the customer, it is your responsibility to declare that money. Failure to report can result in you facing penalties and interest so could cost you more in the long run. Keep detailed records of how much you receive otherwise HMRC may estimate it and you could pay more tax.
If you receive tips or gratuities in any other industry please take note. HMRC will find it hard to believe that no one gave you or your staff a tip, especially if you are good at what you do. Are they being accounted for properly?