Tipping: Code of Best Practice

Definitions

Consumers are often confused by the distinction between service charges, tips, gratuities and cover charges. The Code uses the following definitions:

Service Charge

An amount added to the customer's bill before it is presented to the customer. A service charge is almost always based on a percentage of the bill. If it is `discretionary' or 'suggested' the customer is totally free to make payment or not.

Tips and Gratuities

Tips and gratuities are voluntary payments given by the customer, over and above the amount of the bill (and any service charge) and being of the nature of a personal reward from the customer to the worker. Usually, tips are monies left in cash, whereas gratuities (or card tips) are payments made electronically through a card terminal.

Cover Charge

A fixed charge per customer which is usually mandatory. Mandatory charges must be stated on tariffs or, in the case of restaurants, menus.

Tronc

A tronc is an arrangement for the pooling and distribution of service charges, tips and gratuities to workers. Troncs are commonly used in the hotel and catering industry and are increasingly used in the casino sector. A tronc has a special status for the purpose of HM Revenue & Customs (HMRC) regulations relating to income tax and National Insurance (NI).

For a tronc to comply with HMRC regulations, it is an essential requirement that workers decide who participates in the tronc and how distributions are made, not the employer.

Regulations allow for payments made to employees which come from discretionary service charges and or tips, to be left out of earnings when calculating NI. If an organised arrangement exists for a person to act entirely independently of the employer to decide:

• which employees will get a share of discretionary service charges, tips and/or gratuities, and
• how much those employees should get

then there will be no NI liability.

Formal guidance on NI and PAYE income tax is set out in HMRC guide E24.

Tronc master

The person who distributes monies from the tronc is known as the tronc master and is normally a worker or committee representative. The tronc master is responsible for operating PAYE (income tax) on payments distributed through the tronc.

HM Revenue & Customs E24 Guide

The HMRC E24 is a guide to income tax, National Insurance, national minimum wage and VAT and how they apply to service charges, tips, gratuities and troncs.

© 2009 Crown Copyright