HMRC vs Anabel’s, Court of Appeal

Key points

  • The Court of Appeal has accepted the view taken by HMRC that any tips received by an employer, which were transferred to a troncmaster’s bank account before being distributed by the troncmaster to employees were not paid by the employer to the employees for the purposes of the NMW Regulations, and so do not count as earnings towards the NMW.

What you should do

The Court of Appeal’s decision in this long running case will have significant legal and tax implications for all businesses operating physical tronc systems, even if these are not used to meet the NMW. Those businesses operating a virtual tronc where payments are made alongside wages via a single payroll will not be affected.

Employers may need to change administrative arrangements to ensure that they do not use any payments made by troncmasters to top up the pay of their employees to the NMW. If they continue to do so, they will be in breach of their obligations under the NMW Regulations and may face enforcement notices requiring them to pay the NMW and any arrears.

The government has announced that from 1 October 2009, employers will be prohibited from using tips, intended by most customers to go direct to staff, to satisfy their obligations to pay NMW. Instead they will have to pay their employees the NMW and tips paid by customers should be paid on top of this.


Annabel’s (Berkeley Square) Ltd, George (Mount Street) Ltd and Harrys Bar Ltd (together referred to as Annabel’s) operated an arrangement (known as a tronc) to distribute service charges, tips and gratuities (tips) to their waiters and bar staff. Their senior managers (known as the troncmasters) operated these troncs. Discretionary tips were paid into Annabel’s bank account, most often by credit cards and cheques, and an amount equivalent to this was transferred to the troncmasters’ bank accounts.

Basic wages

The troncmasters accounted for any income tax before issuing pay slips or cash to workers for these troncs on a regular basis. Annabel’s continued to pay its employees’ basic wages, albeit less than the national minimum wage (NMW), on a regular basis and issued separate payslips to the employees.

HM Revenue & Customs Commissioners (HMRC) served enforcement notices on Annabel’s in March 2006, requiring it to pay its employees NMW arrears. A tribunal upheld Annabel’s appeal and withdrew the enforcement notices. The tribunal held that sums distributed by the troncmasters from the troncs were “money payments paid by the employer to the worker” under the National Minimum Wage Regulations 1999 (NMW Regulations).

The EAT upheld HMRC’s appeal and reinstated the enforcement notices. It held that the tribunal had erred in finding that money paid from the troncs had been “paid by the employer” so as to count for the purposes of calculating the NMW.

Property of Annabel’s

Annabel’s appealed to the Court of Appeal, which dismissed the appeal. It found that on receiving payments from customers by credit card or cheque, the tips had become the property of Annabel’s. However, it held that as soon as Annabel’s transferred the monies to the troncmasters’ bank accounts, the money could be said to be held on trust for the employees and Annabel’s no longer retained any legal or beneficial interest in the money.

In effect, the troncmasters acted independently of Annabel’s and did not allocate money from the troncs “on behalf of the employer”.

Comments are closed.