What hospitality businesses need to know about tips and tax evasion21 Feb 2018
Tax evasion is a hot topic, with barely a week going by without another headline highlighting the methods that many corporates and individuals have used to minimise their tax bills. We are now living in a climate of tax shaming, and there is increasing pressure on the government to bring tax evaders to account and punish them appropriately. The Criminal Finances Act is the latest weapon at HMRC’s disposal in the fight against tax evasion.
What is the Criminal Finances Act?
The Criminal Finances Act 2017 came into force on 30 September 2017 and introduces new criminal offences for businesses that fail to prevent the facilitation of evasion of tax. Businesses can be subject to prosecution and unlimited fines when their employees or business associates commit tax evasion – even when the business is unaware of the activity.
How is it relevant to the hospitality sector?
Tipping is common in the hospitality sector. Any business whose employees receive tips could fall foul of the act as a failure to declare tips to HMRC is, naturally, a form of tax evasion. Businesses that do not address this problem risk prosecution.
How can hospitality businesses avoid breaching the act?
If a business is considered to have committed the offence, there is a presumption of guilt unless it can prove that it had reasonable procedures in place to prevent the criminal conduct. For the hospitality sector, such procedures should include ensuring that their employees are aware of their duty to declare tips to HMRC, and the implementation of a policy dealing with the handling of tips. It is recommended that such a policy contains details of the following:
1. How tips are distributed. E.g. is a tronc used?
2. If a tronc is used, the name of the troncmaster
3. Whether cash and card tips are treated differently
4. Any deductions taken from tips
5. What happens during leave? E.g. holidays and sick leave
Often the most convenient and effective method of ensuring that all tips are declared is to operate a tronc arrangement that is subject to income tax. If a business arranges a tronc and operates an effective policy prohibiting the receipt of tips independent of the tronc, it will have a strong foundation to argue that there is a reasonable procedure in place should it happen to face action under the Act. A business’ response need only be proportionate to the level of risk so such actions need not be excessive provided that they are effective; but the business should also put in place an agreement with the troncmaster.
What are the sanctions?
If a business is found to have breached its obligations under the act, it could face:
1. An unlimited fine
2. Public record of the action which could lead to significant reputational damage
3. Regulatory impact which could include the revocation of licences
Businesses that have not yet considered their obligations under the Criminal Finances Act should immediately carry out a carefully documented risk assessment of their current practices and procedures to identify potential breaches and develop a plan to address the concerns identified.
If you would like any advice on any of the issues raised in this article, please call the Kuits employment team on 0161 832 3434 or contact us.