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Appeal court backs taxman in tips battle

11 May 2009
Issue: 4205 / Categories: News , Income Tax
Tronc system does not count towards minimum wage

The Court of Appeal has found in favour of HMRC in their legal battle over the minimum wage paid to bar and restaurant workers.

The judgment upheld last year’s decision in the case of Annabel's Ltd, George Ltd, and Harry’s Bar Ltd.

The ruling confirmed that employers must pay their members staff at least the national minimum wage regardless of any tips, gratuities, service charges or cover charges, providing they are not paid by the employer to workers through the payroll.

HMRC had argued that payment via a tronc — the system of pooling and distributing tips to workers in the service industries — does not count towards the national minimum wage. Gratuities paid to employees are not subject to Class 1 National Insurance, provided the employer is not the one who allocates the tips to each employee - i.e. if they have apportioned by a troncmaster.

Lord Justice Rimer in his decision said that it was ‘an irresistible inference that the employers’ purpose behind the establishment of the troncmaster arrangements was (at least in part) to take advantage of the exemption from National Insurance contributions in respect of gratuities’.

Now that it is illegal to make up the national minimum wage using tips, the employer will have to pay wages in the normal way.

The fact that decided the appeal, said Rimer LJ, was that ‘payments to the employees of their respective shares of the tronc moneys were not “payments paid by the employer to the worker” for the purposes of Regulation 30(a)’ of the NMW Regulations 1999 (SI 1999/584).

The employers were ordered to pay HMRC’s costs and pay arrears of £125,000 to the workers concerned. The full decision can be found here.

Issue: 4205 / Categories: News , Income Tax
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