Understanding IR35 for hairdressers

The new IR35 tax laws can be confusing for self-employed hairdressers. Understanding IR35, what it means for your business, and the tax implications is essential to ensure your hairdressing business is compliant.

With 54% of people in the hairdressing and beauty industry being self-employed, it’s a prevalent concern in the sector, so today, we’ll clarify:

• What is the new IR35 tax regulation?
• How does IR35 work?
• What does it mean to be inside or outside of IR35?
• How will being categorised as IR35 hairdressers impact self-employed businesses?

IR35 law seeks to clarify the difference between employees and contractors (or self-employed individuals). 

To put it simply, an employee is employed by the business, answers to a manager and is paid a salary for set working hours. 

Contractors are paid fees for short-term work periods and generally cease the work when the project is complete or their services are no longer required.

The rules impact hairdressers hired by a salon or another beauty business, such as a wedding hairdresser, over extended periods. Busy periods and a shortage of qualified staff may mean that these businesses look to find self-employed hairdressers to meet demand.

If the agreement constitutes deemed employment, for example, the self-employed worker has to work fixed hours or can’t pick and choose when they work, IR35 may apply.

The regulation means that the business will need to deduct at-source taxes from the hairdresser’s payslip, including tax and National Insurance, processing pay through their PAYE system.

Hiring contractors is normally more tax-efficient than taking on employees because the employer won’t need to account for the employer’s National Insurance or payroll processing costs.

Therefore, reviewing the HMRC rules for disguised employees is critical, even if the self-employed person trades through a limited company, such as a personal services company. 

Businesses are required to assess each contractor or self-employed worker to determine whether the IR35 classification applies.

However, self-employed hairdressers working for small businesses may remain responsible for assessing their own employment status.

HMRC may also send investigators to businesses to check contracts and working agreements to determine whether the working relationship exists inside or outside of IR35.

If a contractor is inside IR35, they are treated the same as other employees for payment and tax deduction purposes. You’ll fall into IR35 if:

• The business dictates your regular working hours.
• You are required to wear a specific uniform.
• There is a manager you must report to.

In essence, the worker acts as an employee and is treated as such. However, they would have reduced tax exposure if this employment continues in the guise of self-employment.

Should HMRC investigations identify that a business is continuing with disguised employment, they will instruct the payroll amendments to be made to pay all future remuneration through payroll.

Contractors outside of IR35 tend to have very different working arrangements:

• They are paid for contracted times – which might be hourly, weekly, or per project.
• The individual sets their employment terms.
• There are no employment benefits provided.
• The contractor manages their clients and invoicing processes.

It is easiest to prove non-IR35 status if you have multiple clients and don’t receive the bulk of your income from one business.

Where the contractor has an incorporated business or a personal services company, the same rules apply – but if they are determined to be outside IR35, they can choose how to pay themselves, usually through a combination of salary and dividends.

Self-employment is common in the hairdressing industry, usually with the individual hiring a chair in a salon and bringing their own independent clients into the business.

In most cases, the professional is a self-employed contractor and isn’t employed by the salon where they rent space to work.

There are a few ways to support the case for being treated as a genuine freelancer:

• Having a rental contract or agreement with the salon.
• Establishing a system for managing bookings, payments and clients independently from the workplace.
• Evidence that you run a business separately from the operation of the salon.
• Proof that you select your own working hours and aren’t required to be at work for any specific period on any day.
• A bookkeeping system, business insurance, and other administrative assets as required to run an independent contractor trade. 

Salon owners hiring out spaces to self-employed hairdressers can also take steps to protect themselves from the potential for an IR35 investigation, looking into the terms of any business relationships.

Hiring owners should not handle appointments or payments for the individuals who rent chairs or attempt to solicit their clients for later business. 

They should use a separate payment system, which isn’t open to self-employed contractors, and avoid asking independent hairdressers to work hours in line with other employees.

Again, a watertight contract setting out the terms of the rental, costs, and the separation of responsibilities is ideal to ensure both businesses have an element of security against the potential for investigation or business disruption. 

If you’re a self-employed hairdresser, you’ll know how much time financial tasks require, adding stress and an extra workload to the end of each busy day.

The prospect of IR35 has caused a great deal of concern, but having an established, reliable bookkeeping and business accounting app can take the strain out of demonstrating compliance and keeping clear records of your income, tax deductions and outgoings.

Countingup is a hybrid accountancy app and business current account, with free features such as real-time tax estimates to make planning your cash flow simpler and less time-consuming.

Find out more here and sign up free today.