HMRC has given its guidance in publication E24.
Tronc is special arrangement allowed by HMRC for catering trade to distribute tips received from customers.
Main takeaways from the guidance are as follows:
1- If tips are optional, no VAT is to be charged.
2- Income tax is to be deducted from tips in all circumstances.
3- NIC is not due on tips (extract from PAYE 72080), if :
A – Customers pay tips direct to employees and the employer is not involved; or
B – i) Customers pay voluntary service charges and / or tips to the employer; and
ii) The employer passes some or all of the charges / tips to a tronc; and
iii) The employer is not involved in deciding how much each tronc member receives from the tronc.
4- Employers must pay their staff at least National minimum wage in addition to tips.
In effect Tronc system saves National Insurance Contributions of both employer and employee.
Also , see recent ICAEW Webinar
Key takeaways from ICAEW Webnair:
- Its usual to maintain around one month of reserve in Tronc.
- We need inform HMRC when a new Tronc scheme is set up and who is the Troncmaster. Ensure to mention in the letter to request HMRC not to open another PAYE Scheme.
- Every time Troncmaster changes we should inform HMRC.
- Tronc is not subject to auto-enrollment pensions.
- Some restaurant put cover charges on the bill. These are mandatory so VAT is charged on these plus not part of Tronc system.
- Service charge belongs to the Business this was decided in European Court of Human Rights in Nerva and others v United Kingdom  36 EHRR.
- Troncmaster can be and usually is appointed by the employer.
- In practice credit card tips are processed through Tronc. Cash tips are distributed by staff among themselves. As a good practice employer should add a note to payslip to remind employees that cash tips are taxable income and they should declare it to HMRC seperately.
Also further guidance is given in HMRC National Insurance Manual – NIM02900CO