asked the Chancellor of the Exchequer what is the Inland Revenue practice in relation to the tax treatment of tips and if he will make a statement.
In law, tips are part of an employee's taxable income in the same way as his other earnings. In some businesses tips can form a substantial part of an employee's take-home pay. Unfortunately not all employees return details of the tips they receive. In these circumstances inspectors of taxes may have to make an estimate of the tips earned on the basis of the facts available to ensure that the correct amount of tax is paid. Any employee who disagrees with the estimate may, however, appeal in the usual way. If agreement on the correct figure cannot be reached, the matter may be considered at an informal meeting before the independent general commissioners.
Before making an estimate for tips, inspectors of taxes are, however, instructed to establish first who is and who is not in a position to receive them. Wherever possible, they are asked to negotiate agreed figures with the employees concerned, or with their representatives. In the case of postmen's tips, some tax offices did not follow all the instructions of the Inland Revenue's head office. The Inland Revenue apologises for this and has reminded the offices concerned of the need to establish the facts with local post office management and staff.
In the many instances where correct procedures have been followed, however, substantial amounts of tips have subsequently been returned. A recent exercise over a period of about a year was conducted by tax offices in one of the 14 tax regions in relation to the hotel and catering industry. In a review of employees at 500 or so establishments, amounts averaging from £750 to £1,500 per annum per employee depending on the size of the establishment were agreed upon once the facts had been established, yielding additional revenue for one year alone of some £650,000. The negotiations leading to these agreements involved discussions wth individual employees in many cases; or with their representatives where large numbers were employed at a particular establishment. The lowest average agreed tips per full-time employee at any one of the establishments involved was £750 per annum; and some individuals at the larger, well-known establishments agreed they received tips of up to £7,500 per annum.
Such investigations are carried out by the Inland Revenue as part of its duties to counter evasion wherever it may occur.