How to avoid tipping off the taxman

Hotel and restaurant staff who take part of their income as tips should be wary of the taxman. Paul Slade tots up the bill.

Many poorly paid staff in the restaurant and hotel trade rely on tips from satisfied customers to top up their weekly earnings. But, if they fail to declare these tips for tax, they could find themselves in trouble.

Mike Warburton, of accountants Grant Thornton, warns that staff and employers alike will face stiffer investigation by the Inland Revenue on the tax due from this income under the new self-assessment regime. "I wouldn't put it past tax inspectors to go and sit in a restaurant incognito just to see what's going on," he says. "Don't assume that the person sitting at that table who's just given you a tip is not a tax inspector."

Under self-assessment, the emphasis of the Revenue's work is shifting towards collecting tax which currently goes unpaid. Mr Warburton says: "You and I know that there is a lot of money that gets paid out in tips that never gets taxed. It's an obvious one for the Revenue to have a go at."

A Revenue spokesman confirms that the Revenue will be putting more emphasis on chasing unpaid tax, and that this will include pursuing individuals benefiting from untaxed tips. "We'll be putting more resources into dealing with recalcitrant taxpayers rather than people who are scrupulous," he says.

As far as the Inland Revenue is concerned, tips are part of the worker's income, and are liable to tax in exactly the same way as wages. Nor does this tough new stance simply affect staff. Employers who operate systems to share out accumulated tips may find the Revenue presents them with a bill for all the Paye and National Insurance contributions which he should have deducted from the tips pool before sharing it out.

If inspectors decide tax should have been collected by the employer, they can then go back as far as six years to collect outstanding payments, as well as making penalty and interest charges.

By the time all these elements are added up, Warburton says, the bill could come to pounds 3,000 or more per member of staff, even where each staff member takes an average of just pounds 20 a week in tips. "You could be talking about bankrupting some of these businesses."

His advice to employers who want to avoid Paye and NIC liabilities, is to take themselves out of the loop by arranging for staff to administer the sharing out of tips themselves, in what is known as a "troncmaster scheme". Warburton also advises employers to keep records of how much goes into the tips pool each week and which employees benefit. Without this, he says, the Revenue may not accept the employer is in the clear.

The other side of the coin, of course, is that the tax inspector then has the information he needs to pursue the individual staff involved. National Insurance liability is unlikely to apply, but penalties, interest and up to six years worth of back-tax may still be due. "You could argue this is just shifting the burden on to someone else," Mr Warburton says. "But it shifts the burden on to the person who has the liability."

Staff taking annual tips of more than pounds 500 a year - equivalent to just pounds 10 a week - should be declaring the income on their own tax return. As low wage earners with no investment income, waiters and similar staff are unlikely to receive a tax return without requesting one.

But the fact that penalties for failing to file on time become automatic under self-assessment means those penalties are far more likely to be used - and not just against the rich. Again, the bill could amount to several thousand pounds.

Tim Jones, a tax manager at Arthur Andersen, says: "It's a catch-all provision for the Revenue. Once they find out about someone with this sort of income, they can demand their returns for prior years. Then they fine them, they surcharge them, and they charge interest. Then they come to a back-duty settlement and make a lot of money out of it."

The Inland Revenue spokesman says: "If they have untaxed income, then it's their responsibility to tell us that. Someone who receives tips in excess of pounds 500 a year will need to be in self-assessment and get a tax return."

He adds that says anyone receiving tips income of under pounds 500 a year should inform the Revenue of this, and will be contacted once every three years to confirm the pounds 500 ceiling has not been breached. Where tips amount to less than pounds 500 a year, the individual's tax code is adjusted to take extra tax from his or her wage rather than the tips.

Mr Jones says: "They do raid restaurants now and again and, if you happen to come into their clutches, they're going to ask you about previous years. Once your name is on the Revenue's system, you'll never get out of it."

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

election 2015The 10 best quotes of the campaign
A caravan being used as a polling station in Ford near Salisbury, during the 2010 election
election 2015The Independent's guide to get you through polling day
David Blunkett joins the Labour candidate for Redcar Anna Turley on a campaigning visit last month
voicesWhat I learnt from my years in government, by the former Home Secretary David Blunkett
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Editor-in-chief - Financial Services - City, London

    £60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Guru Careers: Management Accountant

    £27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

    Guru Careers: Project Manager / Business Analyst

    £40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

    Day In a Page

    General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

    'We will not sit down with Nicola Sturgeon'

    In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
    VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

    How ordinary Britons celebrated VE Day

    Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
    They came in with William Caxton's printing press, but typefaces still matter in the digital age

    Typefaces still matter in the digital age

    A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
    Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

    'Missing link' between Earth's two life-forms found

    New microbial species tells us something about our dark past, say scientists
    The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

    Pan Am Experience: A 'flight' back to the 70s

    Tim Walker checks in and checks out a four-hour journey with a difference
    Humans aren't alone in indulging in politics - it's everywhere in the animal world

    Humans aren't alone in indulging in politics

    Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
    Crisp sales are in decline - but this tasty trivia might tempt back the turncoats

    Crisp sales are in decline

    As a nation we're filling up on popcorn and pitta chips and forsaking their potato-based predecessors
    Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

    Ronald McDonald the muse

    A new wave of artists is taking inspiration from the fast food chain
    13 best picnic blankets

    13 best picnic blankets

    Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
    Barcelona 3 Bayern Munich 0 player ratings: Lionel Messi scores twice - but does he score highest in our ratings?

    Barcelona vs Bayern Munich player ratings

    Lionel Messi scores twice - but does he score highest in our ratings?
    Martin Guptill: Explosive New Zealand batsman who sets the range for Kiwis' big guns

    Explosive batsman who sets the range for Kiwis' big guns

    Martin Guptill has smashed early runs for Derbyshire and tells Richard Edwards to expect more from the 'freakish' Brendon McCullum and his buoyant team during their tour of England
    General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

    Miliband's unlikely journey from hapless geek to heart-throb

    He was meant to be Labour's biggest handicap - but has become almost an asset
    General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

    On the margins

    From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
    Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

    'This is the battle of young Egypt for the future of our country'

    Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
    Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

    Why patients must rely less on doctors

    Improving our own health is the 'blockbuster drug of the century'