Proposed changes to allocation of tips for hospitality businesses

Proposed changes to allocation of tips for hospitality businesses

The Employment (Allocation of Tips) Bill was introduced in June 2022 and entered the report stage in January 2023. It is currently progressing through the House of Commons and is expected to become law within the next 18 months.

Whilst the proposed changes to employment law are yet to be sanctioned by both Houses, it is likely they will be confirmed and the hospitality sector should start considering how it will implement the requirements of the new law.

In order for businesses to take the appropriate actions once the new laws apply, it is prudent to understand now what these proposed changes are and what the impact could be to businesses who fail to operate the new law.

What are the proposed legislative changes?

The proposed bill extends to England, Wales and Scotland, but not Northern Ireland.

The intention is that the bill will provide a greater level of transparency for employees in regard to how the tips should be treated.

The bill would amend the Employment Rights Act 1996 and will require employers to ensure the following:

• All tips, gratuities and service charges must be paid to workers in full without deductions and by the end of the following month.
• An obligation for employers to ensure the arrangements to distribute tips are fair, even when distributed by an independent Tronc scheme.

As these requirements will be set out in employment law, to employers who fail to ensure full and fair payment could be subject to claims via employment tribunals. Businesses who withhold administration costs, or a flat percentage of service charges from the pool of tips will be failing to apply the law if it goes through. As a result, the ‘fair’ test would also fail to be applied.   

What is a Tronc Scheme?

Tronc Schemes are a mechanism used for the distribution of discretionary tips, gratuities and service charges. A Tronc scheme should be operated by a ‘Tronc Master’ who may be an individual within the business, or a third party or organisation who should act independent of the business/employer in determining how the pool of tips is to be distributed amongst staff.

We are increasingly seeing the hospitality sector engage with third parties to act as Tronc Master and operate an independent scheme on behalf of employers. Businesses who engage with a third party should ensure the third party is aware of the proposed changes and a strategy for implementing any changes required once the changes become law should be agreed.

The use of a Tronc Scheme is beneficial for employers and employees due to the National Insurance Contribution (NIC) relief that is available. In simplistic terms, PAYE tax is due, however there is a relief from NIC. In comparison, if a Tronc is not used, and tips are being passed to the employees then the payment will only be exempt from NIC if it meets either of the following two conditions:

• It is not paid, directly or indirectly, to the employee by the employer and does not comprise or represent monies previously paid to the employer, for example by customers
• It is not allocated, directly or indirectly to the employee by the employer.

The requirement in the draft legislation for employers to ensure the tips are distributed fairly will increase the level of interaction between the Tronc Scheme and the employer. As one of the requirements for a legitimate scheme is for it to be operated independently of the employer, it is not clear yet whether HMRC will consider schemes are truly independent and businesses should be careful when meeting the ‘fair’ requirement not to impact the independence of the scheme.

How can we help?

Azets’ employment tax team has an in-depth knowledge of the tax and National Insurance treatment of tips and the setting up and operation of Tronc Schemes. Where we act as Tronc Master for a hospitality business as part of our responsibilities, we have started discussing the proposed additional legislation and importantly planning to ensure the employing business will be ready when the changes become law.

If you would like to know more about the changes and how they may impact your business, please get in touch with a member of our specialist team or your usual Azets advisor. We are also on hand should you wish to know more about Tronc Schemes and third party Tronc Masters.