I don’t normally like doing a ‘negative’ blog, but I think this is a very important one. Operating a tronc scheme is a popular way for UK hospitality businesses to distribute tips fairly among staff while managing tax obligations efficiently.
However, choosing the right Troncmaster is crucial for compliance with HMRC regulations. Understanding who cannot serve in this role is essential for avoiding costly penalties and ensuring tronc schemes operate legally.
What is a Troncmaster?
A Troncmaster is an independent person appointed to manage and distribute tips, gratuities, and service charges collected by a business. They act as an intermediary between the employer and employees, ensuring tips are distributed fairly according to agreed arrangements while handling the associated tax and National Insurance obligations.
Who cannot be a Troncmaster?
HMRC has strict rules about Troncmaster eligibility to maintain the independence required and achieve the National Insurance Contribution (NIC) savings. Savings that benefit both the employer and employee.
The following individuals are prohibited from serving as Troncmasters, if such savings are to be achieved.
1. The employer or business owner
- Company Directors
- Business proprietors
- Partners in partnerships
- Sole traders who own the establishment
This is the most fundamental restriction. The employer cannot be the Troncmaster because it would eliminate the independence that makes tronc exempt from National Insurance Contributions..
2. Close relatives of the employer
- Spouses or civil partners of the employer
- Children, parents, or siblings of the employer
- Other close family members who might not act independently
A Troncmaster must have full independence from the employer.
3. Individuals with financial control over the business
- Company secretaries with financial authority
- Those with power of attorney for business matters
- Anyone who can make financial decisions on behalf of the company
4. Employees in management positions
While regular employees can serve as Troncmasters, those in certain management roles may be excluded:
- General managers with hiring/firing authority
- Financial controllers or accountants employed by the business
- Payroll managers
- HR managers
- Anyone whose employment contract gives them authority over tip distribution
5. Individuals with conflicts of interest
- Accountants or bookkeepers who also manage the business’s finances
- Anyone who receives a financial benefit from tip distribution decisions beyond their fair share as an employee
- Individuals who cannot demonstrate independence from the employer
Consequences of invalid Troncmaster appointments
Appointing an ineligible Troncmaster can have serious consequences; employers must heed the following:
Loss of tax advantages
If HMRC determines the Troncmaster lacks independence, the entire tronc scheme may be invalid, resulting in:
- Employer National Insurance contributions are levied on all tips
- Potential backdated charges
- Loss of tax-efficient tip distribution
It is important to stress that these costs and risks fall back on the employer, not the employees. If anyone listed in the groups above acts as the Troncmaster, the distribution of the tips is effectively a payment from employment and therefore should be processed through payroll for both income tax and NIC.
Penalties and interest
- Late payment penalties on unpaid National Insurance
- Interest charges on outstanding amounts
- Potential investigation into business tax affairs
Choosing an eligible Troncmaster is fundamental to operating a compliant and effective tronc scheme. The restrictions exist to ensure genuine independence, which is what makes these arrangements tax-efficient for both employers and employees.
Remember that the consequences of getting this wrong can be significant, both financially and administratively. When in doubt, seek professional advice to ensure your tronc scheme meets all HMRC requirements and serves your business and employees effectively.
Many operators use third-party Trocnmaster services, such as those provided by Tips and Troncs. Not only can there be no risk of the Troncmaster not being impartial, but it also takes the administrative burden off the Troncmaster employee and the risk of non-compliance from the employer.