Hundreds of London's restaurants could face bankruptcy following the launch of a massive Inland Revenue offensive on badly run tronc schemes that could lead to huge backdated tax bills and fines.
The Inland Revenue's Compliance Projects Unit in Euston, London, has commissioned investigations into 300 London restaurants since mid-April, looking at the way tronc schemes are being run.
Restaurants found to not comply with the current guidelines could find themselves with a bill for six years' backdated national insurance contributions, plus interest and penalties.
The number of restaurants being investigated is unprecedented, according to tronc expert Steve Wright, a chartered accountant with Wheawill & Sudworth. He believes about 95% of restaurants are running their troncs incorrectly, with many using tips to bring pay up to the national minimum wage without paying the required national insurance contributions.
Wright said the practice makes the industry a prime target for the special unit. He estimates that a typical London restaurant with a turnover of £1m could be issued with a bill of about £200,000. "The Inland Revenue think that tronc schemes are being manipulated by employers to use service charges to augment the pay staff receive, and they'd be right," he said.
Peter Davies, a compliance case worker with the unit, would not give an exact figure but said that the number of businesses not running the schemes in accordance with regulations was "significant". He agreed that the restaurants, which include well-known groups as well as smaller independent businesses, could face huge costs.
Bankruptcies could not be ruled out. "Certainly some businesses may have a substantial liability, and it will have a consequence on whether they will go or stay in business," he said.
Martin Couchman, of the British Hospitality Association (BHA), estimated the cost to the industry could be £3b-£4b and had the potential to put many restaurants out of business. He said there was confusion and misunderstanding in the industry about how to run tronc schemes. The Inland Revenue and the BHA are meeting for talks in June in order to draw up clear guidelines.
"The tronc has always been a grey area in tax law," he said. "A lot of people doing what they were told in the past was fine are now being told they are doing it wrong. There has clearly been a misunderstanding and changes in the Inland Revenue's attitude. All we can do is try to interpret law in clear way that is satisfactory with the industry."
* The Inland Revenue is also cracking down on waiters who receive cash tips. Cash tips should be declared and tax paid on them, although Steve Wright estimates that fewer than 1% of waiters have done so in the past.
Those who have not declared their tips will receive an estimated national insurance bill, backdated six years, from the Inland Revenue. Wright said many waiters who end up receiving a tax bill of £4,000 to £5,000 would simply "go to ground" or go to see their restaurant manager.
"The Inland Revenue work on the assumption that the restaurant will pay the liability," he said.
What are tronc systems?
Tronc schemes are payrolls set up to distribute customer tips to staff. They must not pass through the employer's hands and should be run by a "tronc-master" - an elected controller of the system. The troncs cannot be used to supplement wages unless national insurance contributions are paid on them.
If a tronc is managed incorrectly, the employer could be liable for national insurance contributions backdated by six years, plus interest and penalties.
By Helen Adkins
Source: Caterer & Hotelkeeper magazine, 15 - 21 May 2003