Pub tip ruling to increase National Insurance bill

New guidelines from the taxman are set to increase the National Insurance bill for pubs which use tips to bring staff up to minimum wage levels.

After almost a year of legal wrangling between the Inland Revenue and the British Hospitality Association (BHA), revised guidelines, due at any time, are expected to rule that it is acceptable to include tips when calculating the minimum wage.

However, both employers and employees will have to pay National Insurance on any money from a tronc scheme - the separate payroll set up to distribute voluntary tips from customers to staff - which is used to meet statutory pay levels. Traditionally, tips have been exempt from National Insurance.

Both the BHA and the revenue have taken advice from legal counsel after restaurants ran into problems with the guidance, known as E24, which was issued in February 2004 to clarify the rules for sharing out tips.

The long-running tax investigation into the restaurant industry, called Operation Gourmet, led to claims that many employers had been abusing the system, as well as demands for unpaid National Insurance going back up to six years.

Steve Wright, a tax expert at accountancy firm Vantis, which has represented a number of leading restaurateurs in cases bought by the revenue, said: "The counsel employed by the BHA disagreed with the Inland Revenue interpretation of the rules in two key areas.

"The revenue has taken its own legal advice and, as a result, we think that the Inland Revenue will say troncs can be used to top up salaries to the minimum wage.

"However, any part of a tronc used to bring employees wages up to the statutory minimum will then be liable to National Insurance."