Tipping In Scotland Law Changes Today

1st October 2024

There are big changes coming for all hospitality staff and operators this autumn. It's called the Employment (Allocation of Tips) Act 2023 and comes into effect on 1 October. It will affect everyone in hospitality - staff and operators alike. And you need to know how it affects you.

Summary
100% of tips will go to staff from 1st October 2024

Cost impact to Scottish employers £5/6 per employee per run.

NI will be paid on all tips dispersed by employer tronc.

Employees face tax of up to 32% on tips.

Cash tips are personnel and cannot be shared.

Tax is paid on personal tips, but no NI. • Tronc costs to increase by 23%.

No Tronc costs can be reclaimed by business.

An external 3rd party Tronc company operating Tronc will ensure staff pay tax on tips but there will be no NI.

Making this tax efficient.

A tip paid on a credit card cannot be dispersed to staff as cash.

No credit card processing fees can be claimed back by employers.
It will be unlawful to alter an employee's regular wage (hourly rate or salary) in return for a share of tips.

Moreover, any guaranteed tips' value cannot count towards meeting National Minimum Wage requirements.

In Scotland the tax benefit to Government is estimated to be £98m.
The ask from business is that the Government contributes to the cost of implementing the system or gives rebate for costs.

The new Tipping Act is a welcome piece of legislation with fairness at its heart. However, as usual, the devil is in the detail. Although welcomed by operators and trade bodies, it appears that the only losers are in fact the employers who will be legally bound to pay all the administration costs the new legislation requires. It is another expense for operators already facing higher costs across all areas of their business.

The good news for staff is that going forward they will receive 100% of their tips - there will be no deductions to cover the cost of fees and administration. Staff need to pay tax on this income, and employers must now pay for any new compliance requirements, any credit card fees, and pay their side of the additional PAYE and National insurance contributions.

It will have impact the bottom line of hospitality businesses which is why the industry is calling on the government, the big winner as a result of the Act, to share some of the costs. Said one, "The biggest beneficiary will be the taxman. It will see its coffers swells as more staff pay tax on their tips."

While it's hard to know for sure, it is thought that tax revenues from Scotland's hospitality sectors will rise by an estimated £98m.That's why operators believe that the government should subsidise or give a rebate for the fees associated with the new Act. If not, they fear that the Act will lead to increased prices, driving inflationary pressures up once again.

Ireland introduced a similar act last year and many businesses were not prepared - The Irish Times reported in December that almost 400 employers were found in breach of new tipping laws. But the UK is also not prepared. David Dillon, CEO and founder of URrocked tells us that their own data shows that as much as 50% of UK smaller businesses are not aware of the changes coming.

Most big operators have been looking at the new legislation and already have an idea of what it will cost them, but when the DRAM called a variety of smaller operators we found that most independent operators were not aware of the upcoming legislation at all and were oblivious to the extra costs that might be incurred - and they are significant.

The total cost to the industry in Scotland is estimated to be between £100m and £200m and every operator will take share of that cost. It will affect everyone businesses and staff alike. The government itself estimates that nearly a fifth of operators may see annual costs increase by between £60,000 and £360,000 depending on the number of staff you have, as a direct result of covering the administrative expenses currently deducted from tips.

The operators, some of the most successful Scotland, believe the cost impact will be between £40k and £180k per year - an additional 2-3% for tronc costs alone. This equates to around £5-£6 per run per employee. On top of that, there will also be additional PAYE and NIC costs - which both employers and staff will have to pay. Employees may be anticipating a wages increase. However any benefits could be wiped out with extra NI. e.g. if you earn £18,200 pa and make £3,640 in tips, the new legislation means you will pay £1,164 in tax and NI on these tips - a ‘cost' of around 32%. Currently operators paying tips through their PAYE system may take a a share of overall tips to cover expenses (say between 3% and 10%) nowhere near 30%. So, although the overall objective is admirable, the taxman is likely to be the biggest beneficiary.

What the Act means:
All staff, agency and otherwise, will receive a share of the total tip ‘pot' with no deductions by operators. However, all tip amounts received will count as income for tax purposes - and will be taxed as such. If it is shared it is taxable at around 32% - and must go through the operators scheme to manage both PAYE and National insurance payments.

For example in the UK 8-10% is deducted from staff earnings and the employer pays around 12-14% through PAYE. Tips are currently not considered as part of any employee's income and are therefore not taxed in the same way as income. This is going to change. All tips will now be considered as income for staff tax purposes and for businesses' HMRC taxable payments due. How tips are taxed depends on the method of distribution:

• Directly to Employees (e.g., cash tips): Employees must report these tips in their self-assessment tax returns. No National Insurance Contributions (NIC) are due in this case

• Collected by Employers: Tips pooled and distributed by employers are subject to PAYE (Pay As You Earn) and both employee and employer NICs

• Tronc Systems: Tips managed through a tronc (a special arrangement where a troncmaster, independent of the employer, allocates tips) are subject to PAYE but not NICs. This is advantageous as it reduces the employer's NIC burden A new statutory Code of Practice will be issued to help guide employers on fair tip distribution which will include the rules regarding hours worked and service roles. All businesses will be required to have a copy for staff to see which lays out their processes - the aim of this is to improve transparency.

Cash Tips
When customers leave cash tips directly on the table or hand them to the service staff, these tips typically go directly to the individual staff members who received them. These tips will now be considered the personal property of the employees and are not processed through the employer's payroll system.

Since the Act primarily focuses on tips and service charges collected by employers (such as through card payments) they fall outside the primary scope of the legislation but this means there can be no pooling of these tips, which feels like a backward step for back-of house and kitchen staff. There is no loophole with cash tips. These must be personal which means they must not be shared in any way.

An employer cannot agree to any sharing of these - this will lead to large fines. If cash tips are shared in any way, they must go through the new process including the compliance and audit procedure and they are a part of taxable income. The good news from a tax efficient perspective is that, unlike tips processed through payroll, cash tips are not subject to National Insurance Contributions (NICs) i.e. they are more tax efficient.

The unintended consequence here is clearly that the rest of the staff team, often unseen, cannot participate in any sharing of this type of tip payment - even if the server and the employer wanted to share the tip. As soon as they do, it has to go through the new system.

Card Tips
When tips are left via credit or debit card payments, these amounts are collected by the employer and usually distributed through payroll, which means that the appropriate taxes are already deducted. It is common for employers to deduct credit card processing fees from the total tip amount.

This will not be allowed under the new act. Employers are prohibited from making any deductions from tips, including credit card processing fees or other administrative costs and all card transaction costs relating to tips must be borne by the operator. Employers will need to ensure they have clear policies and accounting practices to handle these expenses without infringing on the tips intended for employees.

This includes detailing how tips are collected, processed, and distributed and operators must keep records of all tips received and how they are distributed for a minimum of three years. This transparency is intended to prevent disputes and ensure compliance with the new legal standard. Absorbing credit card processing fees and the other new administrative costs will directly impact the financial operations of businesses and might be particularly challenging for smaller businesses with tighter profit margins.

There are software solutions for operators such as the free URocket platform - it is one of the few all-in-one systems that manages the entire process along with the admin and it can do so for employers, individual staff and teams and on all devices.

What About Service Charges?
Service charges are added to the bill and collected by the operator and then distributed to staff. They are often pooled and then shared among the staff according to a predetermined formula which might take into account factors such as different roles, number of hours each employee has worked during the period, seniority and experience and team performance. Service charges distributed to employees are subject to the same taxation rules as regular wages and subject to PAYE tax and National Insurance Contributions (NICs) for both employees and employers.

Currently, when service charges are added to bills and collected by employers, these amounts are processed through their payroll system. Note that the Act does not make a distinction between whether or not a service charge is mandatory or discretionary.

As before, the employer cannot deduct administrative costs such as credit card processing fees, payroll handling charges, and other associated costs so the service pot will be bigger. It means that this is possibly one of the areas where staff might benefit from the new system because PAYE and NI is already being paid - in effect the ‘pot' will grow by the amount of costs the operator cannot ‘reclaim'.

This will, of course, result in more tax being paid by staff (at a rate of around 32%) but wages will be higher and NI costs for both staff and operators will be higher too From the governments perspective it creates new tax revenue stream from the staff and businesses by leveraging the previous non-tax generating cost as a new tax source. For instance- if a business pays £50k for card service charges and payroll fees for managing tips and service charge allocations this currently is treated as a cost in the company's P&L but these costs are currently paid for via the service charge.

In the new set-up, the £50k cost remains (it's actually higher because of the new administration needed) but now this cost is not covered by the service charge income. The £50k is now allocated to staff who will pay around 32% in tax and NI - the government makes £16k, and the staff retain £34k. Nothing has changed, the service, staff and costs are exactly the same, but the government now has £16k that it didn't have before from staff. But the exchequer still has more money to make.

For businesses, not only do they still have the £50k costs, but PAYE and NIC payments will now be higher too because the £50k is being counted as earnings. It's hard not to conclude that it's a win win for the taxman. That's why businesses feel that the government should be contributing to the cost of administering the new legislation.

How Does It Affect Tronc Systems?
A tronc, as most of you will know, is an arrangement used to pool and distribute tips and service charges and managed by a troncmaster, who is independent of the business’s management. The tronc may be In-house tronc scheme with a troncmaster (usually a manager) responsible for the management and distribution of tops to employees. (Although under the new legislation, it clearly states that businesses will be responsible for non-compliance rather than Troncmasters).

Companies may also use a third-party tronc scheme. A Tronc system maybe the most tax-effective under the new legislation for employers and employees. As tips managed through a tronc are subject to PAYE but not NICs for either the employee or the employer. All tips pooled in a tronc must be distributed to employees without any deductions for administrative costs, credit card processing fees, or other expenses and agency workers must be included in the distribution of tips within a tronc, to ensure that they receive tips similarly to permanent staff.

Companies report that implementing and maintaining their own compliant tronc system can be resource-intensive and costly, particularly for businesses with both permanent and agency workers and the new act will add significant administrative complexity, which might result in inefficiencies and even an increased potential for disputes over tip distribution. Absorbing these new expenses may also be difficult for some smaller businesses. The risk is that by not considering the additional cost burden, operators might have no option to either reduce wages to offset these costs, cut staff numbers or increase prices. In some cases they may opt to close altogether.

Again businesses such as URocked might be a solution. The 4 year-old business was set up to help a small operator manage tips after the founder was horrified at the cost of a tronc system his mother was using. The software is provided free to operators and it automatically distributes 100% of the tips to staff - and pays out the tips up to 3 times a week. If it is used as a tronc then the extra benefit might be the management of NIC costs. Whatever the case, businesses need to find ways of minimise the cost of implementation and need to start looking at solutions now - October isn’t far away.

As we have seen in Ireland, fines will be swift and hefty. And government needs to look at ways to minimise the cost impact for operators to avoid job losses, protect wages and employment, and manage more inflationary pressures.

A digital Solution

BBC
Workers must keep all customer tips under new law