The recent announcement by Business Secretary Sajid Jarved, that he intends to take a serious look at the issues raised when restaurants distribute tips to their staff, came about following reports that some restaurants deduct an administration fee from the tip before it is paid over to the employee.
On the face of it the practice would appear wrong, and as a result, many accused restaurant owners of cheating low paid employees. But is this fair or are there other factors to consider before accusing restaurant owners of all manner of wrongdoing?
Could it really be that the taxman is skimming off the tip and not the restaurant owner?
The tax and National Insurance legislation on tips is not that straightforward at all.
Taking income tax first, there is no argument that tips are taxable but the tax is collected differently depending upon who determines how they are shared amongst employees, so:
- if the employer receives the tip and determines how it is to be shared out between employees, then the employer must deduct income tax under PAYE;
- if the employer simply passes the tip on to a nominated employee who determines how they will be shared out, then there is no PAYE and instead the employee must pay any income tax due when they complete their tax return.
Employers will generally only get involved in the distribution in order to ensure tips are shared amongst all employees (including chefs etc.) rather than benefitting waiting staff alone.
So what about National Insurance? The tip is liable to NIC unless:
- the employer is not involved in its sharing;
- the employee does not have a right to a fixed sum for tips; and
- the tips are not compulsory service charges.
In collecting the tips and paying them out fairly to employees, the employer has become responsible for not only collecting the tax due on behalf of HMRC, but also for paying employers NIC which could be up to 13.8 per cent of the tip.
In claiming employer NIC, it is HMRC that is benefitting from the current arrangements and so it is only right the employer should seek to deduct the NIC cost from the tip in the same way HMRC requires it to deduct income tax under PAYE. If the restaurant owner is unable to recover the cost direct then it would appear its choice is to absorb the cost or pass it on to customers in the form of an increased price.