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 if (extract from PAYE 72080):
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 atleast National minimium wage in addition to tips.
In effect tronc system saves National Insurance Contributions of both employer and employee.