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HMRC internal manual

National Insurance Manual

Tips, gratuities and service charges: Nerva v R. L. & G Ltd [1997] ICR 11 (CA): Relevance of the decision

Gratuities paid by credit/debit cards or cheques

It is common practice for customers to add gratuities to payments made by credit/debit cards and or cheques. As the credit/debit card vouchers or cheques are made out in the employer’s name those vouchers/cheques are the employer’s property. Where an employer subsequently pays to employees some or all of the gratuities paid by customers, the payments made by the employer are not gratuities. They are, however, in respect of gratuities and as such can be disregarded from earnings if either condition 1 or 2 described in NIM02905 is satisfied.

If gratuities are paid by cheque and or credit/debit card and the employer then passes on some or all of the amounts paid as gratuities direct to employees, HMRC considers that the employer does not satisfy either of the conditions in NIM02905.


Manjit, the proprietor of a restaurant, decides that all cheque and credit/debit card tips paid by each customer should be passed on to the employee who served that customer.

The tips received by cheque and credit/debit card are initially paid to Manjit, so they represent monies previously paid to the employer and therefore the first condition for exemption (NIM02921) cannot be satisfied. The second condition (NIM02922) is also not satisfied. The tips are initially paid to Manjit. He then decides who should receive what amount. Therefore, he has allocated the tips to the employees. NICs are payable on these tips.

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Gratuities paid by cash

Where gratuities are paid by cash HMRC applies the same principles as for payments made by credit/debit cards or cheques.

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If an employer

  • passes on to his employees directly, without involving a third party, all or part of gratuities paid by customers whether originally paid by credit/debit cards, cheques or cash;
  • considers that one of the gratuity disregard conditions ([NIM02905]( are satisfied

establish the employer’s reasons and send a submission to PAYE, SA & NIC (NIC Technical).