Why you shouldn\’t believe HMRC

Because it\’s not certain that they actually know the law themselves:

“Restaurant owners are supposed to apply income tax and National Insurance to tips, but when tips are paid in cash, it’s all too easy for waiting staff to pocket them and for the proprietor to turn a blind eye. It’s understandable as many restaurant staff are on low wages.”

Or perhaps we should blame the accountants there for not knowing the law.

OK, so, it\’s entirely possible that I\’m out of date here but traditionally (and the same is true in the US, for the same reason) tips are subject to income tax but not to NI (or Social Security).

The reason being that they are income, yes, so income tax should be paid. However, they are not a payment from the employer to the worker, which is what would make them subject to NI. They are a gratuity, a payment from the customer to the waitron unit, and are no more liable to NI than me giving you a fiver in the street is subject to NI.

If there is a service charge (defined as one that does not say \”we have added a suggested x%\”, one that if you ask they will take off the bill, but one that says \”this is the service charge\”) then this is indeed a payment from the customer to the restaurant and is subject to VAT, then two sets of NI and income tax before the waitron gets their hands on it.

There\’s a slightly grey area in there as well: if the tips are pooled (a usual UK system and a very unusual US one) and then handed out it depends upon who is doing it. If it\’s the waitrons doing it themselves then there is again income tax due but no NI. If it\’s the company which organises this then NI, well, at least HMRC insists it is, is due.

As I say, I might well be out of date. But it would be odd that such a fundamental change in tax law had taken place: the distinction between a voluntary payment, a gratuity, between two people and a payment to a company/business is pretty basic.

Oh, and that is why waiters definitely like places without a service charge. For for every £ that the customers hand over, in a tipping place the waiters get 80p. In a service charge place, every £ turns into 45/50 p in their pockets (20% VAT off the top, 25 % NI and 20% income tax).

3 thoughts on “Why you shouldn\’t believe HMRC”

  1. The Pedant-General

    “Oh, and that is why waiters definitely like places without a service charge. ”

    And because more often than not, the waitron units have no visibility whatsoever of the amount collected at all allowing the restaurant owner/manager to siphon off a chunk before splitting the rest.

    Extracting your tip from payments made to the restaurant via an add on to the punters’ credit card bill is non-trivial.

  2. A friend owns and runs a restaurant, and from what I’ve gleaned from her I think you are correct – as long as the staff organise the tips pool themselves, and the owner has nothing to do with it, it is purely income tax to pay.

  3. Surreptitious Evil

    Under UK tax law, the pool is normally a “tronc“.

    And, as has been stated, payments to the tronc from credit-card tips are non-NI, payments to the staff from service-charges (pooled or direct) are “pay” for the purposes of PAYE.

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