Taxing tips - The waiting game

There is a fair possibility that if anyone said to you they had met a troncmaster, you would think it was the latest incarnation of disc jockey.

In fact, this unbelievably obscure job - unknown even to accountants and many tax professionals - is now the subject of the Inland Revenue's latest purge.

A troncmaster is a man who divides up tips in restaurants. For some sexist reason, the concept of a troncmistress has not yet reached these shores.

He has a dual purpose. First, he is responsible for ensuring that the tips are fairly divided between all members of the catering staff entitled to a share. In the swankiest restaurants, this could include the maitre d', waiters (whether wine or ordinary) and cooking staff including that big-name chef.

Since gratuities can form a large proportion of the income of some of these individuals, and overheated temperaments might be involved, the troncmaster does not have the easiest job. The second role of the troncmaster is to ensure there is complete independence from the employer and that payments into the tronc by way of cheque or credit do not need to be included within earnings for national insurance contributions (NIC) purposes.

As a by-product of this, the PAYE in respect of the tronc is administered by the troncmaster and not by the company.

The NIC exemption is by no means guaranteed, and is entirely dependent upon the way in which the tronc is operated. The Revenue appears to be taking a much firmer stance, as a consequence of a European Court of Human Rights ruling last year in the case of Nerva and others v. the United Kingdom.

The UK government fought very hard in this case, which had a particular set of circumstances.

However, its wider application is arguably questionable.

In the case where an employee did not earn enough to reach the national minimum wage, then their tips were taken into account. As such, the tips were supplementary remuneration, regardless of the intentions of the diners, and could reasonably be deemed to be part of the employee's earnings for national insurance purposes.

It is worth taking great care to avoid an NIC liability. Since many employees in the catering business do not earn above the NIC upper limit (£30,940 p.a.), there is a combined charge at the moment of 23.8%, 12.8% from the employer and 11% from the employee. This is actually a larger charge than the employee's income tax.

As part of the 2001 social security (contributions) regulations, a gratuity or offering is outside the NIC net if it is either not made directly or indirectly by the employer, and does not comprise or represent sums previously paid to the employer (unlikely in most cases); or the employer does not allocate the payments, directly or indirectly, to the earner.

There are two different elements to this exemption, which might give the Revenue the right to justify the hawkish approach it is currently taking. The first is that the payment is not a gratuity or offering, but is effectively contractual. This would be the case where there is a compulsory service charge of a fixed sum. This explains why so many menus have at the bottom either 'service charge not included' or 'an optional gratuity of 10% will be added to your bill'.

One would hope that in either of these circumstances, the Revenue would accept these payments are a gratuity since the diner can offer nothing or anything. The second leg to this exception is that the employer does not allocate the payment.

In a recent meeting with an inspector of taxes, the view was put forward that, since restaurant managers were the troncmasters, this implied the company had control over payments. As the group in question had around 80 outlets, it seems unlikely the person acting as troncmaster could be regarded as representing the company's board.

Clearly, if there is any contractual obligation, a strong element of control or if the company imposes a formula on the troncmaster then the poor waiters and waitresses are going to suffer.

The Revenue's inspectors are within their rights to seek proper payment of NICs, and it is hoped their attitude will be reasonable when checking up on tronc.

One point to emphasise is that it is accepted by all parties that, where gratuities or tips are left in the form of cash that is not pooled, these will fall outside the PAYE and NIC nets.

There is one obvious conclusion to reach from this rude introduction to the mysteries of the tronc. Unless you are happy to give almost a quarter of any gratuity to HM government, the future for tippers remains very firmly with cash.