The hospitality industry is fast realising that a tronc scheme is the best way to pool tips and distribute them fairly, reports Troncmasters' Katie Linstead.
With this system, staff receive the maximum amount of money, whilst the business pays the minimum National Insurance.
Troncs are simple in principle, but the nuances of how they are set up, implemented, and managed are far from straightforward.
And getting it wrong can mean tough penalties; should HMRC believe a tronc was not properly set up, it could decide to levy National Insurance liabilities to the employer and employees. These could go as far back as four years.
The risk of this happening to a business appears high. When we are contacted by employers looking to set up a tronc or review a tronc they have in place, it is clear there are common misconceptions and errors across the industry.
Here are three of the biggest mistakes we see being made:
1. Distributing tips using PAYE without a tronc
Yes, you can do this, but it costs you and your employees a lot of money.
Paying tips through PAYE without a tronc is not financially efficient: tax and National Insurance are deducted from staff pay; the business also has to pay National Insurance.
Because employees are getting paid less than via a tronc, this inefficiency also creates an ethical issue. So even if you successfully administer tips this way, it's fair to say you should consider a tronc.
A tronc system will mean management will not be able to handle tips and service charges, but the positive is everyone will pay less to HMRC. The individual will save 12% in National Insurance contributions on the tip, and the employer will save 13.8%.
2. Letting staff take tips in cash from the till
Tips have a long tradition of being given as cash from customers to staff.
But this is changing because many customers now pay by card and other contactless methods. It’s no surprise, then, that many businesses allow staff to ‘cash out’ from the till when tips are paid in this way.
The bad news is this is not compliant and could be viewed by HMRC as illegal. During the pandemic, HMRC updated their regulations so that all card monies must be paid through payroll. It could even be seen as tax evasion if you do not do this.
By opening the till, the business effectively decides who receives what, invalidating the tronc scheme.
Furthermore, the staff member receiving the cash now has the added task of declaring tips to HMRC through self-assessment.
3. Appointing a member of the leadership team as Troncmaster
This is one of the most common mistakes businesses make.
Last year, IRIS Software and Censuswide carried out a survey across 500 hospitality businesses. It revealed more than 50% of companies using a tronc scheme had non-compliant Troncmasters as they were either a Director/Business Owner (30%) or a Manager (38%).
The likelihood is that these roles have involvement in the hiring process, and this is something that would make them ineligible to be a Troncmaster.
A Troncmaster cannot be the owner of the business or a director, nor can they be anyone with hiring responsibilities. This often includes managers and HR personnel.
To escape anything up to four years’ National Insurance liability, the staff must be paid outside employment.
Troncmasters helps businesses set up tronc schemes – whether that’s through expert advice or by providing a full outsourcing service. Find out more at troncmasters.co.uk