Simple question:
I remember reading in the last two to three months that HMRC had assessed a cafe for something around £10k for PAYE/NI not payed on their estimation of the level of tips. Tax being what it is the cafe owner had to prove that this number was too high (i.e. burden of proof is on defendant). I've been looking for this article which I believe was on this site but can not find it so would really appreciate links to it.
Less simple question:
Client in question has a small cafe. Tips are a few pounds a day and are divided between the two or three staff working there on any particular day without any involvement from the owner. Staff typically work between 1 and 3 days a week so quite a few different staff members over the week. Job of supervisor/chef is shared between 3 people in the course of a week. So this fits somewhere between direct receipt of tips (up to employee to declare on tax return) and running a tronc (which requires tronc master to manage a payroll scheme).
If treated as running a tronc the costs of collecting data, managing the payroll etc far outweigh the amounts of money in question (which may £2 per day for any staff member and I would estimate between £5 and £20 per month). These costs would need to be paid by owner. It is also unlikely that anyone would be willing to act as troncmaster.
So the question is what is the appropriate treatment here? What would be seen as reasonable in these circumstances?
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PAYE coding out
I am aware that in the case of coach drivers their tips are coded out on an assumed estimated basis - no troncmaster or other employer extra admin involved, the cash goes direct from customer to employee and the employer operates the PAYE code number as issued by HMRC. However, I have never heard of this being the situation with cafes / restaurants, however it does seem to me to be a straightforward and trouble-free arrangement which, if I were operating a cafe or restaurant, I would seek to secure.
I suppose the subtle difference is that for a coach driver there is no way the employer can evaluate the tips, they arise away from any possible management supervision or knowledge.
Another point with cafes / restaurants is that the employer might physically handle the tips and thus becomes the payer responsible for tax thereon. Better to seek a coach drivers type arrangement whereby the tips are a private arrangement between the customer and the employee outside the control and responsuibility of the employer.
What could undermine the simplified taxation of tips (as in coach drivers) is if the menu has words along the lines "Service not included". Now, to me those words mean something like "pay a tip please" and as the service of an employee is to his/her employer and the serving service is given by the employer to the customer, then this undermines the coach driver type arrangement.
Apart from the principles involved there is the question of quantum, a matter of negotiation - here's how I would negotiate on this. Immediately start proper records of tips, then using a current accurate statistical sample extrapolate it back in time allowing for inflation.
Here's some official guidance on tips in general:
https://www.gov.uk/tips-at-work/tips-and-tax
Here's some wording / guidance on that page that I rather like and recommend following:
Cash tips paid directly to you
If you get cash tips directly from a customer, you have to pay tax on them but not National Insurance.
If you fill in a Self Assessment tax return, you have to include the tips on it.
If you don’t fill out a tax return then HM Revenue & Customs (HMRC) will estimate your tips based on information from you or your employer. HMRC will give your employer a tax code so they can collect tax through Pay As You Earn (PAYE). This is where tax is taken from your wages before you get them.