A guide to tips, gratuities, service charges and troncs for the UK Hospitality industry

22/08/2018

UK hospitality businesses are in unique situation among service businesses. A thriving, innovative and high-profile sector, it is constantly challenged to meet the expectations and perceptions of the public, employees, investors and authorities.

In trying to meet this challenge, practices around the distribution of tips, gratuities and service charges are regularly called into the spotlight. HOSPA’s tips and tronc guide seeks to explain your options for distributing this money in a way that complies with the law. It also outlines the tax implications of each option.

We hope this guide will inform your discussions, clarify your options and their consequences, and help you as you strive to formulate the best approach for your particular business.

The heart of the guide includes an explanation of ‘troncs’ and their operation.

Tips, gratuities and service charges in the UK hospitality industry

Service staff in restaurants, bars, hotels and event locations work as a team to provide different elements of the total experience to the customer. However, the relationship is sometimes perceived as a personal one with individual customer-facing staff members. As a result, the customer often sees tips (or gratuities) as an additional reward for the staff member they deal with most directly.

Service charges are often applied in restaurants, bars and hotels – usually as a percentage ranging from 10 to 15 percent of the menu or tariff price, or 5 percent of the accommodation price. In practice, similar percentages are sometimes added voluntarily by customers as tips or gratuities where no service charge applies.

Service charge revenue and tips paid on with a credit or debit card can lawfully be retained by the business. The same legal status does not apply to tips paid by cash and this needs to be treated differently.

Most businesses distribute some or all of the discretionary revenues they receive from customers to their employees or use them as part of their pay structures.

These are just a few of the factors that contribute to the complexity of the subject.

Using a Tronc

Many hospitality businesses operate a ‘tronc’ for the collection and distribution of non-cash tips and discretionary service charges. Distributing these funds through a tronc provides financial and operational benefits for all parties – business owner, employee and customer.

Troncs have grown in popularity as more and more customers choose to use payment cards over cash for their transactions.  This means tips and gratuities increasingly fall under the legal ownership of the business, and it is down to the business to decide how to distribute it and who receives a share. Most employers favor using a tronc to do this as the tax liability on the distribution is the same as it would be for a cash tip.

In this guide we explain the rules of operation for a tronc as well as what is required for it to be recognised for tax purposes.

What makes this subject so special to the UK hospitality industry?

For many employees in the hospitality industry, part of their earnings are considered to be separate from their remuneration from their employer. This is the part that comes from discretionary payments made by customers for the service they receive.

Employers recognise that every staff member plays a part in delivering the service to the customer and look to include a wider pool of team members in the distribution of the tips and gratuities under their control. Naturally this leads to a range of different approaches and policies across the industry.

Such variations can result in frustrations and misunderstandings. As a consequence, the government, unions, employers, consumer bodies and the industry are keen to develop standards that address the key issues and that are relevant to today’s business environment. This guide is designed to inform and assist in those deliberations.

Transparency is an important principle on which to base the growing body of best practice standards. The aim should be for hospitality businesses to remain free to set policies that work for them and that they communicate their practices clearly and openly to employees and customers.

For more information on tronc contact Peter Davies