Sarah Offord
Chartered Management Accountant
Midas Accountancy
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Coffee Shopes, Tips and Grumpy staff

Coffee Shopes, Tips and Grumpy staff

My client owns three coffee shops. I haven't had the chance to grill the client thoroughly on how he treats tips, but what I have gleaned from the extremely grumpy employees is that the tips are all put into a central pot from which the employer treat them to an annual night out open to all staff, but tough luck if you can't make it to the night out.

The staff aren't terribly pleased about this but from what I can gather, there is no tax or nice deducted from the tips nor is there an official process for dealing with them. My understanding is that the tips can be held and distributed by a nominated person that is not the employer, but that tax and nics will need to be deducted

Please could, anyone advise on the way the tips are currently being dealt with, am I missing something? Also is there a better way to deal with tips in these types of business?

Thank you in advance for any help

SD

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22nd May 2012 19:56

I guess

This may be quite a neat way of dealing with it.  If he declares the tips as income of the business (which would include paying tax and VAT on it), but then takes the staff for an annual night out, he can claim a deduction for this in his accounts (cancelling out the tax charge on the extra income), plus VAT back as the annual office event (cancelling out the VAT paid on the extra income) as long as it does not cost more than £150 per head, and it becomes an annual event.

Net cost to him - zero

Anything else will involve troncs, national insurance, PAYE schemes etc etc.....

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By Hansa
22nd May 2012 20:20

I'm not surprised the staff are grumpy!

I thought the old "tronc" system died (except in the best silver service restaurants) in the '70's when enforcement of NI/Tax was enforced on restaurant owners.  (When I was a student in the late '70's I worked as a waiter in several places including the Cafe Royal and so claim some personal knowledge that even by then the tronc system was all but dead. All waiting staff were "advised" (by their respective restaurant managers) to declare £5 a week in tips! - the actual then was more like £50+ and that was 35 years ago, against a wages council minimum pay level of around £40p.w.). 

In truth it is usually a way for the owner to get his hands on some "tax free" loot (I'll wager the staff (let alone the Revenue) are not given a daily account of tips received!).  Personally I would have not have worked under such a regime knowing that the owner was keeping 90% and distributing the rest by a patronising "I'll stand you a night out using the money YOUR customers gave YOU for good service" ... 

Seriously, if a year's tips buy only a seat at an annual 'bash', the level of service must be atrocious or the owner is taking more than 90% out.  As a rule of thumb tips should exceed salary by at least 25% so even if we assume minimum wage I would estimate the average full time waiter should trouser at least £200 per week in tips. (The "permanent" waiters I knew lived on tips and saved their salaries for the trip back to Italy etc) 

... and this doesn't address the issue of Tax & NI which I'll leave for others to deal with.

Final thought (if it wasn't obvious) is to let the staff keep their tips and declare what they will.  The OP's client will see the workrate shoot up and absenteeism drop like a stone! 

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Mister E
22nd May 2012 22:45

Thank You!

Hansa wrote:

Final thought (if it wasn't obvious) is to let the staff keep their tips and declare what they will.  The OP's client will see the workrate shoot up and absenteeism drop like a stone! 

They are facing a mass exodus of staff at present so this may be the way to go.

I take it if the employer were to distribute the cash from the tips on a weekly basis amongst the staff I would need to add the tips to their payslips when calculating the tax and NICs? Many of the staff are part-time and fall under the tax threshold anyway, so I don't forsee this would create a massive problem.

Seriously I can't believe the staff have put up with this. I would have told them to foxtrot oscar a long time a go!

Thanks for the advice!

 

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By Hansa
Kent accountant
22nd May 2012 23:38

Staff keeping tips

I think this is the best route (after all it's the staff that earned it).  However a word of caution.

If the owner collects tips by way of "10% (or more likely 12.5%%) on the bill", he will have received the money and will have to add it to wage packets (and more importantly) deduct tax & NI from the amounts paid out.  This would also apply to a "pot" marked "Tips" beside the till. 

Far better (in my humble opine) if he stamps "service not included" on the bills and lets customers leave whatever they want for the waiter/ess to trouser without reference to him.  (The staff will also get far more that way) 

This way he has absolutely nothing to do with the tips (as it should be) and is NOT liable to deduct PAYE from the amounts staff may or may not receive.The efficient/hard-working/friendly staff will prefer this (I never met a socialist waiter who wants to share tips).Poor staff (for the same reason) will leave of their own accord if they don't make enoughCustomers prefer it (I think - at least I do) if the waiter who serves them gets to keep 100% of the tipThe temptation is removed for the person counting the money, prior to sharing it to include themselves! if they go straight from  customer to staff

Finally, I have absolutely no idea what current revenue practice is regarding tips as I guess these employees don't do SA returns.  However I would warn the staff that they SHOULD be ready to declare a modest amount - say £20 a week (better if it's consistent). 

 

As a completely irrelevant aside, I was in Venice last year (it must be the most expensive city on earth for eating).  Having been stung for a huge amount + 12.5% service for an indifferent meal, the waiter came to each table and asked that the guest(s) not to forget to leave a tip as the management nicked the entire service charge! ... I wonder if the OP's client has been to Venice recently, I think he'd fit in well. 

 

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25th May 2012 10:51

Just keep the tips in a draw and say no more about it!!

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shurst
25th May 2012 11:02

Standard practice

bigmuggsy wrote:

Just keep the tips in a draw and say no more about it!!

And an easy score for HMRC (when they can be bothered)

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By G1
25th May 2012 11:06

Kitchen staff

Would seem very unfair for waiters to pocket the lot - what about the kitchen staff?  Would not be many tips if the food was dreadful!! Though sounds like employer taking something not his to take.

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By BMary83
25th May 2012 11:08

HMRC Investigation

Apologies if this has already been mentioned as I haven't read all the responses but I had a client who had a HMRC enquiry on this very issue.  From memory the restaurant owner took responsibility for dividing up the tips (these were tips that were collected by credit card, not cash) and therefore was liable for the tax & NIC. 

From there we advised the owner not to accept tips by credit card, cash only, for which the waiter or waitress and the responsibility for taking care of themselves.  It was suggested by the tax manager to put up a sign in the restaurant advising patrons to tip directly to the waiter or waitress and that they no longer accepted tips by card, although I don't know if the client took this on board.

 

 

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25th May 2012 11:20

Troncs do still exist.  We had one when we ran a restaurant 6 years ago so that all the staff (including the kitchen staff - which everyone seems to have forgotten) benefitted.  It went into a pot and the staff were treated to a Christmas Celebration away somewhere, usually of their choice.   We always had to add to the pot so that everyone had a good night out and paid for nothing -  including drinks, taxis. Tips are on the low side in smaller restaurants so the staff did quite well out of it. (This included staff who had left during the year). 

If we see a service charge on a bill we never return to that particular establishment. We tip well but wont be actually charged as we consider  it is just an increase in the bill going directly to the proprietor and unlikely that  the staff  get the money. 

TheAncientOne

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25th May 2012 16:32

Rules quite complex

There is actually quite good information about this on the HMRC website so it is worth looking at it.

The first point to determine is whether the tips are voluntary or resulting from a compulsory service charge. If the tips result from a compulsory service charge they are subject to tax and NI when paid to the employee.

If a service charge is voluntary, and this includes situations when the service charge is added to the bill but where it is made clear that it is voluntary and can be deducted or amended, then the tax and NI depends on who determines the amounts to be distributed to the employees.

If the employer decides on the split and pays it to employees, the payment is subject to both tax and NI.

If there is a "Troncmaster", (who must not be part of the management) and the Troncmaster determines the split, the tronc can be paid without NI deductions, but with tax (normally at base rate) deducted.

The HMRC website says that the Troncmaster should run a separate PAYE scheme but there was an agreement made several years ago (Spirit Group, I think) in which HMRC agreed to one PAYE scheme covering both employer and Troncmaster so long as the Troncmaster told the employer how much of the tronc to pay to each employee and we have successfully received written confirmation that we can apply this for one of our clients.

In these days of paying by card where there is (or should be) an accurate record of service charge/tips paid by card, it is pretty well essential that it can be shown how and who determined the distribution. Of course, in the case of cash tips paid directly to a member of staff, the member of staff should declare those tips and pay tax on them.

This is only a summary of some of the points. The full guidance is more complex and gives examples so this should be consulted before giving any actual advice.

 

John Perry

www.centralbusiness.co.uk

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