Key Takeaways: Tips, Service Charges and TRONCS

With tipping practices back in the spotlight, dealing with cash tips, service charges and TRONCS has become a real concern for many restaurant and hospitality operators.

Leading directors attending the latest Restaurant Directors' Club on Monday, 2 November concluded that despite negative press publicity and misunderstanding by the public, a correctly structured TRONC can increase employees take home pay by up to 12% and provides a means of recruiting, motivating and incentivising employees, but getting it wrong could lead to an expensive National Insurance settlement with HMRC.

The Restaurant Directors' Club, hosted by accountancy firm Jeffreys Henry LLP, is an exclusive roundtable discussion that brings together a cross-section of restaurant owners and industry experts to share ideas, exchange views, discuss current challenges, and do some all-important networking.

Tips, Service Charges and TRONCS

Melanie Gower, Payroll and TRONC specialist from accountancy firm Jeffreys Henry LLP, opened the discussion by explaining the differences between cash tips and discretionary service charge.

Cash tips i.e. those left on the table, remains the property of the employee. Employers can ask for it to be pooled and distributed fairly to all staff but they cannot insist. A discretionary service charge is just that, an optional payment added to each bill and initially the property of the restaurant but can then be fairly distributed to all employees via the TRONC.

Gower explained that although there is no legal requirement to distribute service charge to employees, most restaurants do operate an ethical policy and pass all the service charge onto employees less administration costs such as banking and payroll charges.

A TRONC is a special pay arrangement used to distribute tips and service charges to employees. Usually administered by an independent Troncmaster (who must not be a director or owner), he or she decides how the money is distributed to employees.

Michael Farrelly, Employment Law Consultant at Collins Benson Goldhill, added the Troncmasters should be fully aware of their legal obligations. He or she is held personally responsible by HMRC for any failure to deduct the correct tax from the TRONC.

Employees who receive payments through a TRONC benefit from increased take home pay through a 12% Employees National Insurance saving. Employers also benefit from a 13.8% Employers National Insurance saving.

However, Gower warned that for NIC exemptions to apply, TRONC payments must in no way form part of the employee's contractual pay and that distributions should only be decided by the Troncmaster.

Directors and owners of a restaurant, although difficult in practice, should never get involved. A separate TRONC payroll and bank account should be used. Restaurants where the directors or owners are involved in the management and/or distribution of TRONC payments are not entitled to any National Insurance savings and leave themselves wide open to an expensive HMRC enquiry.

Back in 2006, a popular west-end restaurant was targeted by HMRC's "Operation Gourmet". The tax inspector concluded that because the restaurant director decided how the tip payments were distributed, both the employers and employees National Insurance Contributions exemption was invalid and a revised tax bill backdated 6 years was issued.

A further benefit of a TRONC is the ability to distribute tips and service charges fairly to all front and back of house staff. The Troncmaster can reward individual and group achievements based on staff loyalty, reduced waiting times, or upsell and cross sell targets.

Gower explained there is no single 'fairest' way to distribute TRONC and whatever operators choose to do they must be as transparent as possible by publicising their policy on websites, menu and bills.

Are tips taxable?

She clarified that despite the widespread misconception, all tips, whether cash or service charge, are taxable and subject to income tax, generally at 20%. Unless cash tips are pooled and a TRONC operated, employees must keep a record of all tips received and file a tax return with HMRC.

Auto Enrolment

With the staging date for compulsory Pension Auto Enrolment just around the corner for many restaurants, this latest Restaurant Directors' Club outlined what operators must do to comply yet remain profitable.

Shaun Moran, Pension specialist from Jeffreys Henry Financial Services, advised operators not to wait until the last minute to enrol staff into a workplace pension and should start planning 9 to 12 months before their staging date.

He explained that broadly speaking any employees with "qualifying earnings" of £10,000 or more per annum must be automatically enrolled into a pension scheme.

"Qualifying earnings" is made up of salary, wages, commission, bonuses and overtime. TRONC payments do not form part of the "qualifying earnings".

Employers must contribute 1% of "qualifying earnings" (rising to 3% from 2018).

Moran stressed the benefits of "postponement" for restaurant operators with a largely casual and transient workforce. "Postponement" allows operators to delay automatic enrolment for all employees by up to three months.

He also explained it is possible for employees to voluntarily "opt-out" of the scheme, however they must be enrolled again every three years.

National Living Wage

From April 2016, a new £7.20 per hour National Living Wage will be introduced for employees aged 25 and over, and set to rise to £9.00 per hour by 2020. Some operators welcomed the change but others will look at staff rostering more closely to increase productivity, use technology such as table ordering and mobile payments to reduce head count. Others will pass the additional costs onto customers with an increase in menu prices.

Some operators will keep 100% of the service charge. Under current regulations, tips and service charges cannot be used to make up National Minimum Wage. It is understood the same rules will apply with the National Living Wage.

Free Tips, Service Charges and TRONC Review

Jeffreys Henry LLP is one of the UK's leading firms of Chartered Accountants with significant restaurant experience. We work with Michelin-starred restaurants, themed restaurant groups, individual bistros, gastro pubs and pop-ups. As well as taking full responsibility for your day-to-day accounting function, we act as your 'trusted adviser', providing guidance and support on operations, tips and TRONCS, financing, margins and opportunities.

We provide a free, no obligation health check on your current tips, TRONC and service charge arrangements. The health check identifies areas that may leave your current TRONC arrangements invalid and areas that can be improved or streamlined.

For further information, or to arrange your free health check, please contact Justin Randall or Mark Tenzer, on 0207 309 2222.