Staying on top of tax regulations and guidelines is crucial for anyone running their own business. From the customers’ perspective, they might hear the phrase VAT but not know whether this is something included in what they pay small businesses such as hairdressers. This article will look at VAT and how it applies to hairdressing businesses, by answering the following questions:
- What is VAT?
- Should hairdressers be VAT registered?
- Do hairdressers charge VAT?
- How do hairdressers process a VAT return?
What is VAT?
VAT is short for Value Added Tax. This is a charge added to the price of many goods and services for consumers. The tax is set at 20%, but consumers in the UK do not pay VAT on food, children’s clothing, books, magazines or charity shop items.
Living expenses, such as domestic gas and electricity bills, energy-saving devices and children’s safety car seats, also have a reduced VAT rate of 5%. This is down to the fact that these are things that are difficult to live without.
A good rule of thumb is that if you could live without the item or service you are purchasing, it will probably be charged at 20%.
Businesses with a turnover of £85,000 or more are legally required to register for VAT. So smaller businesses are not as likely to have the extra 20% charge on their products if they are not meeting this threshold for their finances.
Should hairdressers be VAT registered?
If a salon or self-employed hairdresser is making over £85,000 a year, they are required to register for VAT. This threshold of £85,000 changes slightly every year and usually goes up on the 1st of April. If a hairdressing business is not making this much money, then they will not need to register.
What happens once they are registered?
Once they are registered, the salon or hairdresser must increase their prices to charge the 20% VAT to their customers, and they pay this over to HMRC.
The total they pay back to HMRC will include taking off any VAT the hairdresser has paid to their suppliers for products or services. As hairdressing is a mostly labour-intensive business, there is usually only a small deduction for supplier VAT off their final bill from HMRC. This means that the VAT bill usually comes off the profit margin of a hairdresser or salon owner who is making more than the £85,000 threshold.
There are other VAT methods available to businesses, such as the Flat Rate scheme. This scheme allows a salon to pay 13% (this is the current rate for salons, so always check with HMRC) on their gross turnover, instead of a variable rate based on VAT. Salon owners may choose this to simplify record keeping as they won’t have to keep detailed invoices or receipts for proof. This can help with cash flow since you’ll know how much you are expected to pay.
To be part of the Flat Rate scheme, you must have a turnover of over £85,000 but under £180,000. Always do your research with HMRC to see which is the most tax-efficient structure for your business, or speak to an accountant for support in choosing.
Do hairdressers charge VAT?
Let’s look at how VAT affects the prices of hairdressers, both for their clients and for other hairdressers using salon facilities.
As soon as their turnover hits £85,000, the salon or hairdresser will have to increase their prices by 20%. As they near the VAT threshold they may start to increase their prices slowly, so that their clients are not hit suddenly with a new price.
If a hairstylist is self-employed and travels to their customers’ homes instead of owning a salon, they are less likely to meet the turnover threshold, so they might not charge VAT.
Charging other hairdressers, via chair rentals
It’s a common practice in salons to rent out chairs to self-employed hairdressers. This rental income was previously exempt from VAT until 2012, when it became subject to standard rate tax. Many salons may have used this rental method in the past to avoid being VAT registered.
For salon owners that rent chairs, this means the income they make from the rentals now has to be included in their total business turnover. As we’ve established, if that total turnover, including rental income, is over £85,000 then they will be subject to VAT.
If you are a salon owner who does this, make sure you are including any chair rental fees in your turnover total for HMRC or you could face hefty fines.
How do hairdressers process a VAT return?
When you register for VAT you will receive a certificate with your VAT number and information on where to process the return. A business would usually do a VAT return every three months (quarterly). This three month period is referred to as your ‘accounting period’ with HMRC.
You will fill in your VAT form online and fill in the relevant figures, such as total turnover, your VAT charge total from customer purchases and your deductible total (from supplier costs or travel expenses etc). You will then receive a total VAT bill which you can then pay via online banking, telephone, BACS or Direct Debit.
You can also ask your accountant to file your VAT return for you, once you have given them the authorisation to do so via your HMRC online account.
Remember as well that if filing VAT returns, you’ll need to register for Making Tax Digital by April 2022.
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