30th March 2022
Leaving a tip in a restaurant is a standard practice to follow, however, have you ever thought about the rules surrounding the tax treatment of tips as it may be more complex than you think.
How a tip is treated for income tax and VAT varies depending on how the tip is received, whether or not it is voluntary in nature and how it is passed on to the employee. However, all tips are taxable no matter how they are paid or received.
Cash tips paid directly to employee
When an employee is given a cash tip by a customer it is wholly the employees responsibility to declare the tip to HMRC. This can be done via self-assessment, and they are liable to pay any taxes due on the monies received.
Paid by employer
Tips that are paid via the employer are required to have PAYE and NI contributions deducted before they are paid on to the employee. This is the case however the employer passes on the tip to the employee even if it is not formally processed through the payroll.
Paid by employee (TRONC)
Some businesses use a TRONC to deal with the tips paid and these are distributed via an employee (also known as a “Troncmaster”). It is important that the Troncmaster is not a director or owner of the business. As the tips are paid via an employee and as long as there is no involvement from the employer then there is no NIC liability due, however, the tips will still be subject to PAYE.
Service Charges
If service charge is obligatory then this should be included in the company’s turnover and will be subject to income or corporation tax and VAT, the same as any other income. When distributed to the employees this should then be treated the same as their wages and run through the payroll.
However, if the service charge is voluntary and can be clearly defined as voluntary and the individual paying the service charge is made aware that the service charge is not compulsory then this is outside of the scope for VAT as far as the restaurant is concerned. How this is treated when distributed to employees depends whether it is paid by the employer or employee and dependent on which the rules outlined above should be adhered to.
If this relates to you or your business and you would like further advice, please feel free to contact us on 01903 300230, or email info@thlacccountancy.co.uk.