Last month the Employment (Allocation of Tips) Act 2023 provisions came into force and the Department for Business and Trade (DBT) has now published the revised code of practice on fair and transparent distribution of tips to staff.
The new code of practice covers the method of tip collection and how a business must distribute any tips given by customers to their staff. This is particularly relevant at the moment, as we are now approaching the hospitality sector’s busiest time of the year, when tipping is at its highest level.
The Code of Practice
To ensure fairness and transparency, an employer must ensure the following:
- All tips must be distributed to staff by the end of the month following the month the tip is given
- Clear and objective factors to be used to decide the fair allocation of tips, but discrimination, either direct or indirect, must be considered and avoided
- Employees must be consulted on what fairness looks like for a given workplace and their wishes must be factored into the policy
- If an employer accepts a tronc master*, they are obliged to act if they feel the tronc is being operated in an unfair manner. In other words, they have an obligation to check on how the tronc master is operating the tronc
- To ensure transparency, employers must maintain a record of tips received for three years, which must also include the amount allocated to each worker
- Workers have a right to make a written request to view a tipping record, to include the total amount of qualifying tips received in the period requested and the amount allocated to them
- The records must be kept in accordance with data protection rules
(* A tronc master is the person responsible for ensuring tips, gratuities, and service charges are shared equally through the scheme set up at the workplace and he/she is also responsible for ensuring correct financial reporting to HMRC)
The legal position
Employers’ processes must be fair and transparent, with the new Act containing the following clause: “An employer cannot be said to have met its obligation to handle tips fairly and transparently if individual workers are not aware of their entitlements in line with the tipping policy.”
This clause highlights the importance of having an easily accessible, easy to read and clear policy that employees can easily find. The new code of practice advises employers that, as a matter of course, the policy should be included within the employee’s contact of employment, although this is not a compulsory legal requirement.
When thinking of distribution methods, employers should also ensure agency and temporary staff are not disadvantaged. The Act does not require employers to show details of their policy to the public, but they can do so if they wish
Is the new act really about tax?
There is no doubt that the new act builds in a number of safeguards, which will certainly help protect workers from bad and unscrupulous employers. However, in the opinion of most tax professionals, the real reason that this legislation is being introduced, is because HMRC have long believed that only a fraction of the tips being received, have actually been declared for tax purposes.
Whether or not HMRC will now see the tax take rise steeply is a matter of conjecture, but I suspect that a significant percentage of any tips given in cash to individual staff members, as opposed to paying at the till or through the card machine, will not be declared to HMRC, human nature being what it is.
Finally, with the help and advice of the Chartered Institute of Payroll Professionals (CIPP), I’ve set out below a few things to bear in mind about tips and their tax treatment:
- Any tips received at work do not count towards national minimum wage, and tax is due upon them
- If the tips are distributed by the business owner or someone who has an influence on how the business is run, then the payment is subject to both tax and national insurance
- If the employees elect a tronc master (such as the head waiter or chef, but not the owner of the business), the tronc master decides who and how much each person would be paid out of tips, which are then subject to tax only, via the payroll scheme
Accountant’s view
It is clear that the new Employment Act will undoubtedly assist in protecting ordinary workers from avaricious and dishonest business owners and have the knock-on effect of modestly raising the tax take, which I believe is the real reason that the legislation has been introduced.
