TAX ON TIPS

Waiters, waitresses and bar staff may soon have to start paying National Insurance on tips. The Inland Revenue is targeting restaurants in an attempt to reclaim National Insurance contributions on tip payments to staff. Tips held and distributed to staff through a pooling system at the end of a shift have always escaped NICs provided various tax rules are complied with. The system, known as 'Tronc', is one of the most popular methods of dividing up the cash between restaurant staff. But auditors PricewaterhouseCoopers warned of an upsurge in Inland Revenue investigations and their claims that restaurants are making errors in the system, meaning that NICs are due.

A ruling in the European Court of Human Rights, that tips paid by cheque or credit card are the property of the employer and can form part of the basic staff wage, has only boosted the IR's case. Richard Clarke, tax investigations specialist at PwC, said that restaurants using the Tronc system were "highly likely" to be on the IR's hit list for reclaiming NICs. "If they find errors, the Revenue can look to recover unpaid taxes going back six years," he said. "So a business with a turnover of £10 million could be looking at an employer/employee NIC liability of £350,000 per year plus interest and penalties."

Bob Cotton, chief executive of the British Hospitality Association (BHA), warned that the investigations could spell the end for some businesses. "Given the current economic climate and the tight margins in the industry, these claims could tip the balance for many restaurants between profitability and bankruptcy," he said. Restaurant staff often work long hours, late into the night and many are on the minimum wage. Tips are seen as one of the advantages to the trade and often relied upon to pad out the weekly pay packet. PwC is trying to negotiate a way forward on the issue on behalf of the BHA and the Restaurant Association.