Bar & Restaurant Work: Ownership of Tips
Many people work within the hospitality industry in jobs such as bartending or waiting-on in restaurants and although their basic hourly wage is often set at minimum wage, they can often double their income and earn even more than double as a result of the tips or 'gratuities' they receive from customers.

Difference Between Tips and Service Charges

Tips are given voluntarily by customers to staff as a reward for the service they've received. This amount is discretionary here in the UK and not compulsory, unlike some other countries where, though also not compulsory, a certain percentage of the overall bill is usually added and left as a tip if the service has been good.

Tips are usually administered in one of two ways. The proprietor of the hotel, bar, pub or restaurant will either allow staff to collect tips individually or they'll be collected in what's known as a 'tronc'. This term derives from the French meaning 'collection box' often referred to in the UK as the 'tip jug'. In this scenario, the tips might have been intended for a specific individual but they will be required to place any tips in the tronc to be distributed amongst the staff at a later time. The tronc will be run by a member of staff (troncmaster) who is acting independently of the employer. If the company uses a tronc, it's for the troncmaster (who cannot be the employer or a director of the company) to stipulate how the tips are divided up. If the employer does not have any say on how the tips are shared out, then the tips are not subject to National Insurance (NI) contributions although they are still legally liable for tax which should be paid via the troncmaster if he/she is responsible for dividing and sharing the tips.

Service charges, on the other hand, are compulsory additions to the price charged for a service and, in the hospitality industry, they are usually between 10% and 15% of the total cost of the bill. These are collected by the employer and, if shared amongst the employees via the payroll, they are subject to both tax and NI.

HM Revenue & Customs Implications

Many employers and employees are often guilty of 'overlooking' tips and gratuities when it comes to tax and NI and employees in particular often mistakenly view tips as a 'cash in hand bonus' to their wages. However, it's important to state that ignorance is no escape from the law and mistakes relating to this area can be very costly to an employer if investigated by HMRC and found to be a contravention of the law.

The key things to remember are that income tax is due on all tips, no matter how they are given. If tips are offered in cash from the customer directly to the employee, then the employee should declare them for tax purposes. If the tips come by way of being added to a bill paid for by credit card, then it's the employer's duty to declare them for tax.

If any tronc has not been formally registered with the Inland Revenue, then the business is responsible for deducting the tax and if it doesn't want to be liable for NI contributions too, it must ensure that it has no influence on the way by which the tips are divided. This can be done by holding a written record signed by the staff outlining how they themselves have decided to divide the tips.

The HMRC has recently revised its guidelines on tips and troncs and more detailed information can be found on its website or by obtaining the leaflet E24.