Restaurants and hotels will be able to reclaim millions of pounds back from the tax man after HM Revenue and Customs made an embarrassing U-turn on tronc last week.
Following months of debate, the Revenue has admitted that businesses are allowed to use tronc money to top up salaries to the national minimum wage without incurring national insurance.
The Revenue cracked down on restaurant tronc schemes three years ago with Operation Gourmet.
Companies faced demands for up to six years of back tax and many were driven out of business as a result.
But last week the Revenue conceded it had misinterpreted the law. It now says that as long as tronc money is distributed by an independent tronc master, it can be used to top up wages without paying national insurance.
The tax break remains valid even if the tronc money is distributed through the central payroll system.
It will also no longer demand national insurance where contracts or job adverts mention troncs.
Only schemes where employers, rather than independent tronc masters, allocate the money will attract national insurance.
Peter Davies at Vantis said the Revenue's climb-down represented "a comprehensive victory" that would affect thousands of businesses that were under investigation or out of pocket.
Frank Goldberg, employee tax specialist at BDO Stoy Hayward, said the Revenue's "flawed policy" had cost the industry "angst, countless hours and millions of pounds in professional fees".
Along with refunds and interest, the Revenue could face compensation claims from firms driven to insolvency by its inquiries, added Richard Clarke, tax director at PricewaterhouseCoopers.
The change of heart is widely attributed to the Conran Restaurant Group's decision to take the Revenue's demands for millions of pounds of tax to a tribunal.
The Revenue would not comment on individual cases but admitted that legal advice had showed its reading of the law to be "incorrect".
"The question has to be what sort of legal advice did the Revenue take before embarking on such a hardline interpretation of the law and putting so many people through the wringer?" Davies said.
David Moore, proprietor of London restaurant Pied à Terre, said he would be seeking a refund of the £30,000 he agreed to pay the Revenue to settle a £187,000 penalty.
But Alain Lhermitte, whose Mon Plaisir restaurant was forced into liquidation in early 2004 in the face of demands for £400,000, said he was "too traumatised" by his three-year dispute to pursue compensation.
By Angela Frewin
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