With the increasing amount of tips given by customers on their card or via contactless payment methods, rather than cash, it highlights a practice that some operators allow, which could land them in hot water.
Cashing out.
Cashing out occurs when employees take cash directly from the till to compensate themselves for tips received through card payments. Rather than following proper procedures for tip distribution, staff members effectively exchange card tips for cash from the register, balancing the books on paper whilst bypassing
formal record-keeping.
It might seem like a convenient workaround – the customer’s intention is fulfilled, and the staff member gets their tip. But this practice creates serious compliance risks.
The tax implications
When tips are cashed out informally, they typically go unrecorded. This means they’re not being declared to HMRC, and no National Insurance contributions are being made on them.
HMRC takes a dim view of undeclared income. From their perspective, cash taken from the till without proper documentation looks suspiciously like tax evasion, because that’s essentially what it is. Even if there’s no intention to evade tax, the lack of proper records makes it impossible to prove that tips have been
handled correctly.
The consequences can be severe.
Personal liability for employees – staff members could face tax penalties and be required to pay backdated tax and National Insurance on undeclared tips.
Business penalties – your business could be fined for failing to operate PAYE correctly on tips and for inadequate record-keeping.
Reputational damage – being investigated for tax evasion isn’t exactly the kind of publicity any business wants.
The Employment Rights Act and tip transparency
The Employment (Allocation of Tips) Act 2023 introduced stringent requirements around tip handling. Employers must now allocate tips fairly, keep detailed records, and provide written policies on tip distribution.
Cashing out makes compliance with this legislation virtually impossible. How can you demonstrate fair allocation when there’s no record of who received what? How can you provide the required transparency when transactions are happening off the books? You can’t.
Why proper tronc schemes work
A properly administered tronc scheme provides a legitimate, compliant framework for handling all tips.
Complete transparency – Every tip is recorded, allocated and distributed through a documented system that satisfies HMRC and employment law.
Tax efficiency – Tips through a tronc scheme are exempt from Employer and Employee National Insurance contributions, representing genuine savings versus payroll.
Legal compliance – You meet some of your obligations under the Employment (Allocation of Tips) Act, protecting your business from penalties.
Fair distribution – Tips are allocated according to your agreed policy, preventing disputes and maintaining morale.
Audit trail – Comprehensive records prove tips have been handled correctly if HMRC investigates.
Till integrity – Tips stay separate from operational cash, maintaining financial controls and preventing discrepancies.
Time to make the change
The hospitality sector is under increasing scrutiny on tip handling. HMRC has the tools and motivation to investigate, and penalties are becoming more severe.
A professionally administered tronc scheme protects your business from compliance risks and gives your team the transparency they’re entitled to. It’s not optional in today’s regulatory environment.
If cashing out has become standard practice in your business, now is the time to act.
If you need help establishing a compliant tronc scheme for your hospitality business, Tips and Troncs specialises in professional tronc administration that keeps you fully compliant with HMRC and employment law.
Get in touch to find out how we can help.