Matthew Hutton

Hospitality businesses in Scotland need to prepare for new rules that are due to come into force to ensure all ‘qualifying tips’ given by customers are fairly and wholly distributed to qualifying employees and agency workers.

The Employment (Allocation of Tips) Act 2023, referred to as the Tipping Act, received royal assent in 2023 and will make it unlawful for employers to retain or withhold any qualifying tips (tips, gratuities and voluntary service charges).

Hospitality businesses must ensure they are compliant in advance of the act coming into force on 1 July 2024 in England, Scotland and Wales.

How to prepare for the Tipping Act

Every business with employees or agency workers who receive tips will be affected by these changes. The following steps should help you prepare for the implementation of the act:

1. Ensure 100% of tips are passed on to staff. This includes a ban on withholding any element of the tips designed to cover a proportion of charges on card takings.
2. Ensure that there is a fair distribution of tips. Each business is required to have a written policy governing the allocation of tips which is made available to all qualifying staff.
3. Make staff aware of the Act and your business’ policy. Inform them of any changes you are implementing as a result.
4. Distribute all tips in line with the policy by the end of the month following the date of receipt. Normal payroll processes should be followed for tips paid by the employer, and it must be ensured that the correct tax and National Insurance deductions are made from the tips at source and passed on to HMRC.
5. Keep an ongoing record of the allocation and distribution of tips and keep this record for a rolling period of three years from the date of receipt.
6. Be prepared to provide a copy of the record upon request to any qualifying employee or agency worker.

For businesses already operating an official tronc scheme, where a separate organised arrangement exists to distribute tips, gratuities and service charges, the business can continue to operate this way but will need to ensure the following:

1. The operator of the scheme (the ‘troncmaster’) meets the definition of being independent in the act.
2. The scheme itself qualifies and follows all of the new requirements in the act as listed above.

It is worth noting that HMRC is very interested in tronc schemes, because of the National Insurance advantages that they bring. If you do have a scheme in place, now is a good time to review it to ensure it is compliant with all HMRC’s requirements.

Importance of compliance

In the event of non-compliance, qualifying staff are entitled to bring a claim against the business in an Employment Tribunal. The tribunal has the power to confirm that the employer is in breach of the act, order that they revise the allocation and enforce compensation payments of up to £5,000.

As well as the potential legal and financial penalties of non-compliance, businesses should also consider the potential reputational damage that could be done if they are not following the new laws, and this is reported in the media.

National Minimum Wage

It is important to remember that tips do not count towards pay for National Minimum Wage (NMW) purposes. Normal rules still apply, and all working time must be paid at the required rates excluding tips.

Mandatory change

The new legislation will be a welcome change for hospitality employees and agency workers, as it will give them peace of mind that they are receiving a full and fair allocation of tips. For affected businesses, however, the timing of the introduction of the act might be unpopular, adding another administrative and potential cost burden at a time when the industry faces so many other challenges.

Matthew Hutton is accounting senior manager at Armstrong Watson