Catering Scotland

With pension auto-enrolment and the new National Living Wage placing an upward pressure on wage bills, businesses’ are keener than ever to reduce their tax liabilities wherever possible.

The subject of tips has been in the headlines recently, with Business Secretary Sajid Javid ordering an investigation into the ‘abuse’ of tipping in restaurants. David McComb examines the tax treatment of such tips and provides suggestions to help operators reduce their National Insurance Contributions…

Seasoned hoteliers and restaurateurs are no doubt already be aware that it is their responsibility to process , through the payroll, any tips, gratuities and voluntary service charges left by customers before handing them over to staff. This include subjecting such payments to income tax (PAYE), which can in turn incur National Insurance Contributions (NICs).

However, it is important to note that operators can avoid the need to pay employer and employee NIC by introducing a tronc – a pool of tips which is then distributed separately by a troncmaster, in accordance with the rules put in place by HMRC themselves.

PAYE is accounted for through a separate payroll but with no NICs, and therefore a tronc holds an advantage for employers on what is potentially a significant annual cost. Similarly, the employee enjoys a net pay rise by avoiding the need to pay NIC on tips.

Troncs should be specifically designed for a particular business, and operators should ensure that the correct documentation is in place, HMRC approval is obtained and staff are trained in how the tronc will work in practice.

Salary Sacrifice Arrangements

The other main route to reducing National Insurance Contributions – and sometimes even PAYE – is by implementing a salary sacrifice arrangement. These have become part of the mainstream remuneration arrangements for employees in the UK.

Typically, they include benefits such as pension contributions, childcare vouchers, and Cycle To Work schemes. They can also be extended to include company cars, discounted goods, annual leave, parking spaces, subscriptions and technology (mobile phones and  iPads etc.) amongst others.

In essence, the employee exchanges their salary for one of the benefits mentioned, with the consequent National Insurance saving being shared by both employer and employee.

However, it is important to remember National Minimum Wage considerations, as these benefits do not count towards the figure.

The implementation of a salary sacrifice arrangement is considered a ‘high risk’ area by HMRC, as many businesses get it wrong.

Ineffective salary sacrifice arrangements can lead to Pay As You Earn (PAYE) and National Insurance Contributions (NIC) liabilities on the salary sacrificed,in addition to a tax and/or a NIC liability in relation to the benefit provided, together with interest and penalties.

Recent HMRC activity and tribunal cases, including the Reed Employment Plc’s salary sacrifice arrangement for subsistence payments where £158m was at stake, have highlighted this.

Share Schemes

For management and senior employees, share incentives have become more popular as a way of both incentivising and retaining key staff.

There are a variety of tax-efficient share schemes, with Enterprise Management Incentives (EMI) and Company Share Option Plans (CSOP) being the most popular, depending on the size and nature of a particular enterprise.

While both of these offer tax-efficient growth, however, as increases in the share value are subject to Capital Gains Tax rather than Income Tax and National Insurance, it is worth noting that operating and managing hotels is an excluded trade for an EMI scheme.

And even non-approved schemes can offer NIC savings if the shares are not listed, or a pre-arranged exit is in place.

There are many things to think about in implementing a share scheme and it is not something that should be done without proper consideration of the long-term impact of giving up part of the value of the business to your employees. As with all benefits, it is important that the employee sees the value in them too, otherwise the intended effect could be lost.

David McComb is Tax Director at Mazars UK.

Mazars have a dedicated employment tax and benefits team providing a range of solutions for all sizes of business, as well as a National Payroll Service which handles a number of TRONC scheme payrolls.

For more information on these and any other tax- or finance-related issues, contact Mazars on 0131 313 7900 or visit www.mazars.co.uk.