London department store to cut basic pay to save on taxes

London retailer Fortnum & Mason is attempting to persuade its workforce to accept a cut in basic pay in return for a share of tips in a move that will help reduce its tax liabilities.

The retailer currently does not share with staff any of the 12.5 per cent service charge automatically added to bills paid by diners at its Heathrow bar.

The firm, which recently announced a 27 per cent rise in pre-tax profits to 6.2 million in the year to July, will consult with 20 of its bar staff on introducing a so-called “tronc” system.

Under this system, the 12.5 per cent service charge would be shared among workers – but only if they agree to take a big cut in basic pay.

Cutting basic pay would limit National Insurance Contributions for both Fortnum & Mason and its employees.

Information sent to members of staff show that they would receive a near 11 per cent cut in basic pay, taking them down to the National Minimum Wage (NMW) of £7.20 per hour.

It does not show what proportion of the total service charge paid voluntarily by customers would be shared by workers, Fortnum’s, or a firm called WMT Troncmaster Service that will run the tronc system.

It does, however, make clear that payments are not necessarily guaranteed.

Last year, the same changes were made to nearly all of the 250 staff working at Fortnum & Mason’s café, bar and restaurants.

Matthew Brown, technical officer for the employment taxes subcommittee at the Chartered Institute of Taxation, said payments via a tronc system operated completely separately from the employer were not liable for national insurance.

But as service charges are usually set and controlled by the employer it might be difficult for them to prove they had no involvement in the scheme’s operation, he said.

“There are a lot of savings to be made if this can be done right. I would be surprised if this wasn’t challenged by HMRC,” Brown added.