This is the time of year that many employees have an enhanced expectation that their service will be rewarded in the form of increased tips. It may also be when any accumulated fund, underwritten by the members, is distributed to the employees by the club. Additionally, this is likely to be the point where disputes arise regarding the fair distribution of the tips and their liability for tax.
HMRC states that whilst tips cannot count towards the National Minimum Wage they are subject to Income Tax with some, depending on how they are distributed, liable for National Insurance. The responsibility for ensuring the tax liability is met also varies, depending on how the tip was made.
If a tip is given directly to the employee, then it is liable for Income Tax but not National Insurance and the liability to declare it lies directly with the employee.
If tips are allocated or distributed by the employer, then the employer is liable for ensuring the payment of Income Tax and National Insurance through PAYE.
In certain circumstances the tips may be pooled and distributed by someone other than the employer and this is called a tronc, with the person in control known as the troncmaster. The troncmaster then becomes responsible for ensuring that any Income Tax and National Insurance is remitted through PAYE. Further guidance on tips, troncs and troncmasters is available on gov.uk.
If you impose a mandatory service charge and the money is paid out to your employees, National Insurance is always due on the payments no matter what the arrangements are for sharing out the money. In addition, mandatory service charges are also part of the consideration for the underlying supply and are therefore standard-rated for VAT, therefore the monies available to the employees will be further reduced.
If you do not currently have a policy on tips, or wish to review one, then the government has published a voluntary Code of Best Practice on tips, gratuities and service charges which can be used for guidance.