As our clients in the hospitality sector prepare for the Employment (Allocation of Tips) Act 2023 to come into force on 1 July this year, we have been advising them on managing the financial aspects of the legislation.
Including how to plan for the increased costs associated with the Act and how to further reduce their expenses in other areas to maintain profits.
When the Act comes in, all tips, gratuities, and service charges collected by hospitality businesses must be distributed to staff fairly and without any deductions other than those required by tax law.
It’s important to be aware that this legislation applies to all forms of tips received, whether electronic or cash, and that penalties and potential legal action could occur from the first day that the legislation comes into force.
In other words, you’ll need to be ready to implement the correct policies well before 1 July.
If you’re worried that this regulation of tips could be the ‘tipping point’ for your business, or that it could mean a reduction to your already thin margins, there are some things you can do to mitigate it.
Definitions
Before we get into your options for mitigating the Act’s impact, it’s important to define two of the key terms associated with this issue.
- Tronc: Coming from the French for “money box,” a tronc is a collective pot into which all gratuities and service charges go. Nowadays, this includes digital as well as cash tips.
- Troncmaster: The troncmaster is the individual appointed to oversee the tronc. They must operate independently from the business owner or senior management to ensure that tips are distributed fairly and transparently. They can include lower management employees or outsourcing partners.
Now that we have established these terms, let’s look at the impact that the Act might have on your business.
The impact on your business operations
The introduction of the Act will mean you need to make significant adjustments in how hospitality businesses manage their operations, particularly in handling tips.
Key changes include:
- Record-keeping and policy requirements: Businesses are now required to maintain accurate records of how tips are distributed and to develop a written policy on tip handling. This policy must detail the method of tip distribution and be readily accessible to all employees.
- Role of troncmasters: The Act places restrictions on the involvement of employers in the tipping process. The independence of the troncmaster is crucial to comply with the new legal requirements and to ensure transparency in tip distribution.
- Financial management implications: For businesses, the proper management of tips affects payroll and taxation. The Act's stipulation that tips are distributed without deductions other than those for tax purposes implies that payroll systems must be adapted to handle these transactions separately from regular wages and be reflected in your financial reporting.
- National Insurance Contributions (NICs): Tips processed through an independent tronc system are exempt from NICs, provided they are not paid directly by the employer to the employees. However, if not managed correctly, these arrangements can lead to scrutiny and potential penalties from HM Revenue and Customs (HMRC).
Arguably, the most important thing to be aware of is the financial management implications because many businesses currently deduct some money from the tronc to pay for other costs and staff benefits, such as meals during their shift.
These extractions from the tronc will no longer be permissible and you could find yourself in non-compliance if you continue this practice.
Whilst these changes may seem fairly easy to manage, you must consider the financial repercussions of implementing these changes.
The added expenditure that payroll systems and record-keeping will need to be added to your outgoings and, wherever possible, offset by increased profits or lower costs.
Our advice to businesses
For our clients who are worried about the added expenses, or compliance, that the Act is likely to bring, we’ve been suggesting the following practices:
- Review your cash flow and expenditure to see where you can make savings.
- Reconsider your wage policy to ensure that all employees are being accurately paid for their contributions.
- Look for avenues of cost-cutting, reliefs and exemptions within your tax planning strategy.
- Speak to your accountant about the financial implications of the Act as soon as possible.
On the last point, it’s important to note that we can help you with your wage and employment-related costs as well as give you tailored advice on reducing your tax liabilities to further streamline your cashflow.
Early consultation can help in making the necessary adjustments in a timely manner, ensuring compliance with the new law while maintaining or even improving your business's financial health.
If you require further advice from an experienced accountant, please get in touch.
Call +44 (0) 1856 872983 or email enquiries@scholesca.co.uk
