Are your staff receiving tips electronically via an app rather than in cash or as a share of card payments? Don’t forget that the usual tax rules for tips will still apply.
As part of the general move away from the use of cash, which has only been accelerated by the past two years of the pandemic, a number of electronic or ‘cashless’ tipping solutions have emerged in the last couple of years. These include apps which customers can download to make tips and ‘app-less’ solutions like TipJar or Easytip which allow customers to tip staff or teams at their local bar, restaurant or salon using their phone to scan a QR code.
While this new approach has a number of benefits for employers and staff alike –it’s more transparent, tips are usually paid to staff much quicker, and it can help to reduce administration for employers as well as avoiding the challenges for customers of not having the right change - the shift from cash to electronic solutions doesn’t remove the obligation to pay tax. Accordingly, HMRC has recently updated their guidance on tips, gratuities, service charges and troncs to confirm that tips paid through digital applications still need to be accounted for correctly.
Where tips are received via this method, managed and then distributed by the employer, the employer retains the obligation to account for income tax and national insurance on these payments through PAYE – as would be the case for any other tips controlled by the employer.
Where the tips are paid directly to the employee without the employer’s involvement – for example where the customer downloads an app for this purpose or the employer makes a link available to a third party app in the restaurant or salon - as long as the employer does not receive any of the funds at any point, and does not have any say over how they are distributed, then it is the employees’ responsibility to report the tips received to HMRC. HMRC will then adjust their tax codes to collect the necessary tax. Guidance for employees on how to report tips to HMRC is available on GOV.UK.
Where the electronic system forms part of the collection process for a tronc – where someone other than the employer is responsible for controlling and distributing tips - then the usual tronc rules will apply. The troncmaster who manages the tronc will likely need to operate a PAYE scheme and incorporate any tips received electronically into their accounting systems.