News
September 2008
Tronc Scheme: Employment rights are not on the menu for HMRC
On 16 June 2008 the High Court ruled to support the appeal of HMRC that tips paid through a Tronc scheme do not count towards payment of the National Minimum Wage (NMW).
As a recap, tips have been exempt from National Insurance Contributions (NIC’s) provided the employer does not influence their allocation. The method by which this was ensured has been the Tronc system for many years. The ruling on 16 June stated that as the tips are out of the control of the employer when passed from the Troncmaster to the employee, the employer cannot claim ownership to them at that point and thus cannot use them to fulfil his obligations with regard to the NMW.
This may sound reasonable were it not for the fact that this separation of control of the allocation of tips was enforced by HMRC and is the entire point of the role of the Troncmaster. The position of Troncmaster arose because, according to HMRC, something cannot even be considered a tip if distributed by or even influenced by the employer. Thus we have the catch 22 that tips do not count to the NMW if paid through the Tronc system, and do not count as a tip if they are not.
This actually creates a situation where the combined powers of HMRC and the High Court have effectively overruled the European Court of Human Rights (ECHR).
Back in 2002 the ECHR ruled in the Nerva case that tips could be considered as part of the salary of an individual when considering whether NMW obligations are met. This ruling actually prompted HMRC to attack Tronc schemes for many years to no avail, claiming that they were invalid as they were no longer tips as they were bringing salary up to meet NMW obligations (it was clearly too soon after the Nerva ruling to argue the line they are currently peddling). The current ruling seems to be showing that HMRC are willing to go around in circles on this issue until someone somewhere agrees with them.
The most clandestine aspect of this whole merry-go-round legal fiasco is that HMRC now claim to be championing employee rights, with Denise Glaston of HMRC stating that “Our priority is to ensure that all workers are paid at least the National Minimum Wage” and that this is “Good news for bar and restaurant workers across the UK”.
I am afraid I have to disagree with Ms Glaston. The Tronc system has saved every worker who is paid tips under its auspices the burden of National Insurance on the amounts distributed. To think that the restaurant owners of the UK are suddenly going to be awarding their staff massive pay increases in real terms by increasing salaries whilst maintaining tips is blind to obvious economic truths.
There may be a short term gain but it will be a long term cost for the restaurant workers of the UK. Businesses know that the public are willing to pay the menu price and an added service charge, with the NMW being imposed this burden will have to be met and will result in the gradual cessation of tipping as part of our culture as prices rise and service charges fall away. As such the end result for the employee will be an increased tax bill and the certainty of a level of salary that is likely to breed an ethic of poor service to boot. HMRC would however get their NI both from the employer and the employee and all in the name of employment rights.
Chris Gent, Wilder Coe Chartered Accountants
