HMRC penalties and tribunal fines for non-compliant tipping
You are confident your tips policy is compliant and have set up what you think is a proper tronc scheme. Your tips are being distributed. Staff seem happy. Everything looks fine.
Then HMRC comes knocking.
Suddenly, you’re facing a backdated National Insurance bill that could run into tens of thousands of pounds. Or an ex-employee files a tribunal claim saying tips weren’t distributed fairly. Or both.
With the Employment (Allocation of Tips) Act 2023 now in force and HMRC’s scrutiny of tronc schemes intensifying, the consequences of non-compliance have never been more serious. This article breaks down exactly what’s at stake and what these penalties could mean for your business.
Two types of penalties
When it comes to tipping compliance, you’re essentially playing on two fields. Get it wrong with your tronc scheme, and HMRC comes after you for tax. Get it wrong with how you allocate tips, and your staff can take you to a costly employment tribunal.
Both can be expensive. Both can be damaging. And unfortunately, both can happen at the same time.
HMRC penalties for non-compliant tronc schemes
The main reason businesses set up a tronc scheme is to avoid paying National Insurance on tips. When it’s done properly, neither the employer nor the employee pays NIC on tronc distributions. That’s a saving of 15% NI for the business and 8% in NI deductions for the employee.
If HMRC decides your tronc scheme isn’t compliant, all those savings you thought you were making? You owe them. All of them. That’s both the Employers’ NIC AND the Employees’ NIC. Plus interest. And potentially penalties on top.
How HMRC can come after you
HMRC can go back up to four years when they identify a non-compliant tronc scheme. That’s four years of National Insurance contributions you didn’t pay because you believed your scheme was legitimate.
Consider a restaurant distributing £25,000 in tips each month through what they thought was a compliant tronc scheme. Over four years, that’s £1.2 million in tips distributed.
If HMRC decides your scheme was non-compliant, you’d be liable for:
- Employer’s National Insurance at 15% = £180,000
- Employee’s National Insurance (that you’d need to cover) = approximately £120,000
- Total NI liability = £300,000
Three hundred thousand pounds! And that’s before we even talk about interest and potential penalties.
Why tronc schemes become non-compliant
The most common reason HMRC decides a tronc scheme doesn’t qualify for NI exemption is the wrong person acting as Troncmaster. Check out our blog ‘Who cannot be a Troncmaster’ for more information about this.
The Troncmaster can be an employee, but they must be independent of all employment/hiring responsibilities. If not, HMRC views them as an extension of the employer. That would mean the tronc isn’t truly independent, and suddenly all those tip payments are back “inside employment” and subject to National Insurance.
Other reasons HMRC might challenge your tronc
- The employer influences how tips are distributed
- Mandatory service charges are included in the tronc
- Poor or non-existent record-keeping
- The Troncmaster is a business owner, director, or senior manager
- Tips are not genuinely allocated outside of the employer’s control
- And most worryingly of all, the employee contract guarantees that they will receive tronc payments
Additional possible HMRC penalties
Failure to operate PAYE correctly
The Troncmaster is personally responsible for operating a PAYE scheme on tips distributed through the tronc. Failure to do so can result in them being held personally liable for unpaid tax. HMRC may also direct the employer to operate PAYE on future distributions.
This personal liability is one reason why many businesses choose third-party Troncmaster services rather than placing this burden on an employee.
Inaccuracies in reporting
Penalties for mistakes in tax returns or payroll submissions (RTI) depend on the behaviour that caused the inaccuracy. These penalties range from 0% to 100% of the tax underpaid:
- Careless behaviour: 0% to 30% penalty of the potential lost revenue (PLR)
- Deliberate misstatement: 20% to 70% penalty of the PLR
- Deliberate and concealed: 30% to 100% penalty of the PLR
These penalties can be reduced by making an unprompted disclosure and cooperating fully with HMRC. If you discover an error before HMRC does and report it voluntarily, you can significantly reduce the penalty percentage.
Late filing penalties
Failure to submit payroll information on time through Real Time Information (RTI) can result in penalties based on the number of employees:
- 1-9 employees: £100 per month
- 10-49 employees: £200 per month
- 50-249 employees: £300 per month
- 250+ employees: £400 per month
These penalties accumulate month after month until the situation is resolved.
Late payment penalties
Interest is charged on all late payments of PAYE and National Insurance contributions. A penalty of 5% of the outstanding amount is charged if payment is more than six months late, with an additional 5% after 12 months.
If the debt remains unpaid, you could face a further 5% penalty at the 12-month mark, meaning a total penalty of 15% on top of the original tax due and interest charges.
Criminal proceedings in serious cases
In cases of serious non-compliance, particularly where there is evidence of deliberate fraud or concealment, HMRC may pursue criminal proceedings against the employer or the Troncmaster. This can result in criminal convictions, substantial fines, and even imprisonment in the most severe cases.
While criminal prosecution is rare and reserved for the most serious offences, the fact that it’s a possibility demonstrates how seriously HMRC takes tronc scheme compliance.
Interest and penalties on top
The backdated National Insurance is bad enough, but HMRC doesn’t stop there.
You’ll be charged interest on the unpaid NI from the date it should have been paid. With interest rates fluctuating, this could add thousands more to your bill.
If HMRC believes there was carelessness or deliberate non-compliance, they can add penalties on top of the tax and interest. These can range from 0% to 100% of the tax owed, depending on the circumstances and how cooperative you’ve been.
For serious cases of deliberate concealment, penalties can go even higher.
Employment tribunal claims under the new legislation
Since October 2024, staff have a completely new way to challenge how tips are handled. Under the Employment (Allocation of Tips) Act 2023, workers can now take their employer to an employment tribunal if they believe tips haven’t been allocated fairly.
This is entirely separate from any HMRC issues. You could have a perfectly compliant tronc scheme from a tax perspective, but still face tribunal claims if staff feel the distribution isn’t fair.
What can staff claim for?
Workers can bring tribunal claims if they believe:
- Tips weren’t allocated fairly
- The employer doesn’t have a proper written tipping policy
- Records of tip allocation haven’t been kept properly
- Tips weren’t paid within the required timeframe (by the end of the month following receipt)
- The employer made unauthorised deductions from tips
Tribunal awards of up to £5,000 per employee
If an employment tribunal finds in favour of the employee, they can order:
Financial compensation
The tribunal can award up to £5,000 per employee to compensate for financial losses caused by unfair allocation or non-payment of tips.
Crucially, the tribunal can also award compensation to other employees who were affected but didn’t bring a claim. So one person’s tribunal case could result in payments to multiple staff members.
Revised tip allocation
The tribunal can order you to revise your entire tip allocation system and implement a fairer method going forward.
Policy and record-keeping requirements
You can be ordered to create a proper written tipping policy and maintain adequate records.
Payment of unpaid tips
The tribunal can order you to pay tips that should have been distributed but weren’t, not just to the claimant but to all affected workers.
The hidden costs beyond the fines
The direct financial penalties are serious enough, but they’re not the whole story. Getting caught with non-compliant tipping practices brings a whole raft of additional costs.
Legal fees
Whether you’re dealing with HMRC or an employment tribunal, you’ll need professional advice. Solicitors and tax advisors don’t come cheap. Even if you win, you’ve still spent thousands on legal fees.
Staff morale collapses
Nothing destroys team morale faster than discovering tips haven’t been handled properly. Even if you fix the problem, the damage to trust is done. Expect increased turnover, difficulty recruiting, and a general atmosphere of suspicion.
Reputational damage
Word travels fast in the hospitality industry. If staff are posting on social media about unfair tip distribution or tribunal claims become public, your reputation takes a hit. Customers care about how staff are treated. They’ll vote with their feet.
Time and stress
Dealing with an HMRC investigation or tribunal claim isn’t a quick process. It’s months of stress, paperwork, meetings, and distraction from actually running your business.
Lost savings going forward
If HMRC decides your tronc scheme was non-compliant, you don’t just owe back taxes. You also lose the NI savings going forward until you set up a proper compliant scheme. That’s thousands more each year.
National Minimum Wage implications
If you’re using tips to top up wages to the National Minimum Wage threshold, you’re breaking the law. Tips cannot count towards NMW calculations.
If HMRC discovers you’ve been doing this, they can charge you a penalty of 200% of the underpaid wages. If you’ve underpaid an employee by £2,000 through incorrectly factoring in tips, you could face a £4,000 penalty just for that employee. Multiply that across your workforce, and the numbers get frightening fast.
That penalty is in addition to having to pay the employees what they were owed in the first place.
How HMRC finds out
You might be thinking your scheme isn’t compliant, but how would HMRC even know?
HMRC has several ways of identifying problems:
- Random inspections – HMRC conducts random compliance reviews, and hospitality businesses are a regular target given the prevalence of tronc schemes in the sector.
- Whistle-blowers – disgruntled ex-employees are a common source of HMRC investigations. One email to HMRC about unfair tip distribution, and you could be facing an audit.
- Payroll data analysis – HMRC’s systems can flag unusual patterns in payroll data. If you’re processing large amounts through a tronc PAYE with certain characteristics, it can trigger an investigation.
- Tribunal claims – if an employee takes you to tribunal over tips, you can bet HMRC will take an interest in how your tronc scheme operates from a tax perspective.
Red flags that you might have compliance issues
Not sure if your tronc scheme would pass HMRC scrutiny? Here are the warning signs:
- Your Troncmaster is a manager, owner, director, or has hiring responsibilities
- You don’t have clear written records of every tip distribution
- The business influences how tips are split between staff
- You’re including mandatory service charges in the tronc
- Staff have questioned whether tips are being distributed fairly
- You can’t easily produce three years of tip allocation records
- Your tronc “rules” aren’t documented or shared with staff
- Tips aren’t being paid within the legal timeframe
- The employee contract of employment guarantees that employees will receive tronc payments
If any of these apply to you, it’s time to get professional advice. The longer you wait, the more backdated liability you’re potentially building up.
What to do if you think you’re non-compliant
If you suspect your tronc scheme isn’t compliant, here’s what you should do:
- Get professional advice immediately – speak to a specialist Troncmaster service or a tax advisor who understands tronc schemes. They can audit your current setup and identify issues.
- Fix the problem now – even if you’ve been non-compliant for years, fixing it now limits future exposure. HMRC is generally more lenient with businesses that self-identify problems and take corrective action.
- Consider disclosure – in some cases, it may be worth making a voluntary disclosure to HMRC before they discover the problem themselves. This can significantly reduce penalties.
- Review your tipping policy – make sure your written policy meets all the requirements of the Allocation of Tips Act and that staff understand how tips are allocated.
- Strengthen your record-keeping – start maintaining detailed records immediately if you’re not already. You’ll need them to defend against both HMRC investigations and potential tribunal claims.
Every day you operate with a non-compliant scheme, you’re adding to a potential liability that could come back to haunt you. With both HMRC and employees now having multiple ways to challenge how you handle tips, the risks have never been higher.
Don’t wait for that HMRC letter or tribunal claim to land on your desk. Get your tronc scheme reviewed, fix any issues, and sleep easier knowing you’re protected.