HMRC issues tax guidance on app-based tipping

21/04/2022

When HM Revenue & Customs’ (HMRC’s) current guidance on the tax treatment of tips and troncs was first published back in 2014, tips, discretionary service charges and other gratuities were paid almost exclusively in cash or through card transactions.

Of course, in the eight years since, things have changed dramatically and an increasing number of payments are made via app-based platforms and QR codes, whether for delivery drivers or waiting staff.

Now, HMRC has updated its guidance to take account of these changes and clarify the tax position that applies to different arrangements.

Importantly, the new guidance does not change the tax status of payments made through app-based platforms. These remain taxable income. Instead, it offers further clarification of who is responsible for taxing monies generated via apps and other electronic payments and when National Insurance may or may not be due.

The two key takeaways are:

• Tips and gratuities paid to a business via their own app (so where the money passes through the employer’s hands) are akin to payments made on card. They must be taxed at source and National Insurance will be due unless an independent Troncmaster is in place.
• Tips paid directly via third-party apps to employees (either directly into an employee’s bank account, or through the app provider but without any pooling, sharing or splitting taking place via the app) are not subject to National Insurance and PAYE. They remain taxable, but the onus is on employees to notify HMRC of this income.

App-based tipping arrangements can be set up in many different ways, with seemingly small variations in how they’re operated having sometimes significant impacts on the tax positions of employers and employees alike. For example, if tips or other gratuities paid via an app are then pooled, split or shared between groups of employees then tax at source must be operated via a payroll. If the hospitality business is aware of this pooling (for example, by providing details such as worked hours to the app provider) then they have a legal obligation to notify HMRC of the arrangements or face being held liable for the tax themselves.

It is crucial not to make assumptions about the tax status of any app-based set-up you are using as errors can lead to HMRC enquiries and potentially hefty penalties.

If you are using a tipping app or are planning to do so, contact us now for advice on the tax implications.