Hospitality Accounting- Things You Need to Know
Do you ever wonder about the difference between Tips, Gratuities, and Service charges? To the public these are collectively known as ‘Tips’. However, it is important that you understand the difference between them, and how they are taxed or not taxed.
A tronc is a separate organised pay arrangement sometimes used to distribute tips, gratuities and service charges given by customers. A tronc scheme, managed by a troncmaster, is a way to ensure businesses are compliant with theEmployment (Allocation of Tips) Billwhich came into force in January 2023. The bill focuses on fairness of tip allocations. It requires hospitality businesses to ‘fairly’ allocate 100% of tips to workers no later than the end of the month following the month in which the tips were paid by customers.
We discuss Tronc schemes in more detail here
This is the most common type of tip and is “left on the table in cash”, for an individual representing their appreciation for the good service they have provided. That individual member of staff will go home with a little bit of extra cash to top up their minimum wage income.
Tips stands for “To Insure Prompt Service”, and is usually a sum of money paid to an individual in hospitality,in advanceof a good service. One story I heard revolved around a customer ripping a $50 note in half upon arrival at a hotel in the Caribbean, informing the waiter, “if you look after me during this visit, I will hand you the other half before I leave”. The guest received excellent service during their holiday and the member of staff received a generous tip of $50.
A service charge is a percentage added to the bill to cover service; a predetermined gratuity you could say. It can be mandatory or discretionary. It is mandatory if the customer has no choice but to pay it, and discretionary when the customer can choose to remove it from the bill. It can be any amount set by the pub or restaurant but is typically around 12-15% of the total bill.
If the service charge is mandatory, then, unlike tips or gratuities, this will be classified as part of the business revenue for tax purposes and will be subject to standard rate VAT if applicable. All other tips, gratuities, and discretionary service charges fall outside of the scope for VAT.
HMRC- what’s their view on tips?
From now on we will collectively refer to gratuities, tips and discretionary service charge as “Tips”
Tips are outside the scope of VAT when genuinely freely given. A Tip left on the table or paid up-front to an individual doesn’t go through their payroll so they haven’t been taxed through the PAYE scheme and no National Insurance contributions will be due. As taxpayers, they should inform HMRC of this extra income, usually via their Self-Assessment tax return.
You may think that ‘how, why, and when they are taxed’ isn’t your problem and has nothing to do with you as the business owner. Certainly, in this simple example that is correct, and collecting taxes for HMRC in this example isn’t your responsibility. Everyone’s happy, apart from the chef who prepared the meal, or the bar manager who cleans the beer lines and orders the wine, and every other member of your team that has something to do with the customers experience but hasn’t received any tips!
Payroll for the hospitality industry
In hospitality, however, it is more common to pool the tips so that they can be distributed amongst all staff whether they are customer facing (front of house) or in the Kitchen (back of house). When the tips are distributed this way, it’s a whole different ball game. It now depends on how the tips are shared, and by whom, that will determine how they will be treated by HMRC.
That is why it is important to talk toexperienced hospitality accounting, payroll and taxation experts like Carroll Accountants, to ensure you are following the correct procedures.
Do you ever wonder about the difference between Tips, Gratuities, and Service charges? From a hospitality accounting and taxation point of view they need to be treated differently. Read here for more advice.