Employers can now avoid paying national insurance (NI) altogether by paying staff wages wholly out of tips, according to HM Revenue & Customs' latest interpretation of gratuities and tronc.
Under the interim directives released last week, the Revenue confirmed that national insurance contributions (NICs) were not due on tips as long as the tronc was independently run and the troncmaster allocated the money.
But the guidance also states that tips used to top up earnings to the national minimum wage will not be subject to NICs, providing they follow the tronc rules above and are paid through the employer's payroll.
BHA deputy chief executive Martin Couchman confirmed the latest announcement meant employers could now pay staff no house wages and avoid NI payments altogether.
"If all the tips and service charge was channelled through tronc, it could still be paid through payroll to make up the minimum wage, but employers would avoid paying NI," he explained.
However, Couchman thought the latest announcement from the Revenue was unlikely to cause a dramatic shift in working practices: "It's impractical," he said. "Service charges usually represent about 7% of income, whereas wages are normally a third. The maths just doesn't add up."
Peter Davies, adviser at tax consultancy Vantis, warned: "If employees don't pay any NI then they may not have enough contributions overall, meaning it could well affect their entitlement to state benefits and, in due course, to the state pension."
Couchman added: "The current position raises a lot of questions. This is the fourth variant we've had in three years, so we wouldn't be surprised if it changed again."
Businesses are being advised to wait for the full E24 industry guidelines to be republished before making radical changes to their procedures. These are expected to be available within the next two months.
Latest HMRC View in brief
- National insurance contributions (NICs) are not due if tips, voluntary service charges and gratuities are paid through and allocated by an independently run tronc.
- Employers who mention the existence of a tronc to prospective employees but do not guarantee a specific amount in tips will not be liable for paying NICs.
- If the employer does guarantee a specific amount of tips, this will be considered to be subject to NICs.
By Emily Manson