The Employment Appeal Tribunal ruled in HMRC's favour by supporting current National Minimum Wage legislation relating to tips in a recent case against a well known UK bar and restaurant.

The Judge determined that where restaurant or bar service charges are paid by the customer to the employer, but are then paid into a ‘troncmaster's’ bank account for distribution in accordance with a ‘tronc’ (an independent tips distribution scheme) agreed between the troncmaster and employees, the sums so distributed to employees are not “paid by the employer” for the purposes of being included in any National Minimum Wage calculation. Details on the case are available at http://nds.coi.gov.uk/Content/Detail.asp?ReleaseID?=?370654&NewsAreaID?=?2

This decision means that employers have to pay their staff at least the National Minimum Wage regardless of any tips, gratuities, service or cover charges, so long as the tips are not paid directly through the employer's payroll.

The National Minimum Wage Act 1998 has been in force for nearly ten years. HMRC has operational responsibility for enforcing the minimum wage. The Department for Business, Enterprise and Regulatory Reform (BERR) is responsible for National Minimum Wage policy.

PAYE must be operated on all amounts of tips paid by an employer to an employee. Responsibility for operating PAYE rests with the employer. If there is a tronc operating, the employer is responsible for operating PAYE on the tips.

If customers give cash tips directly to staff or leave them on the table and individual staff members retain them, without any involvement from the employer, then PAYE does not apply. It is the responsibility of the individual employee to advise HMRC of the amounts of money received. The tax will usually be recovered by an adjustment to the employee's PAYE tax code.

Further information on the tax treatment of tips and gratuities, service charges and troncs is available at http://www.hmrc.gov.uk/helpsheets/e24.pdf