Are there particular tax and accounting rules for hairdressers?
What VAT rules are there for hairdressers?
Below is a summary of the key expenses that hairdressers can claim for tax purposes, in line with SA103F Return documentation for HMRC submissions. They will be listed in the same order as the return documentation for clarity purposes.
Goods used or the cost of goods bought for resale purposes
These are materials used by the business and/or sold to customers. Examples include the following:
- Basics such as Shampoo/conditioner.
- Mousse, hairsprays, as well as other finishing products.
- Hair dyes and hair colouring products.
- Consumables stock, including towels, gowns, brushes, mesh, single-use gloves, face masks, and hand sanitising products. This consists of any items given to or used on customers whilst in the business. Use of materials from stock for general use or consumption must be treated as a sale at market value. VAT implications are likely, i.e., if these items are standard-rate at the time of purchase.
- Accounting for stock: this is only required if the business is accruals accounting.
- Wages, salaries, and other staff costs
During the recruitment process, employment status checks should be conducted to decide whether staff are self-employed or contracted employees. The wages, salary, or fees the business pay staff for working for them are tax-deductible.
Suppose the staff are employees; the business must operate under Pay-As-You-Earn, deducting tax and National Insurance. Real-Time Information (RTI) is mandatory in reporting for HMRC submissions.
Provision of Benefits in Kind costs stemming from the benefits and any Class 1a NIC are tax-deductible. It should be noted that P11Ds may be required for completion to report any benefits and reimbursed expenses.
If the business pays the employer’s National Insurance, they may have the option to claim back the National Insurance employer’s allowance through their payroll. Hairdressers cannot claim NI if they have claimed it back. It should be noted that pension auto-enrolment is now a compulsory legal requirement for employers.
Cars, van, and travel expenses
The cost of business travel can be expensed and is tax-deductible. Travel to and from work is not a deductible expense if attendance at the business is “frequent and predictable”.
For example, salon businesses are unlikely to qualify for tax relief on costs stemming from travel from home to the salon. Other journeys, including to the bank or appointments at different locations, would, however, likely qualify.
For mobile hairdressers, the costs from home to each irregular customer and between customers will be considered business travel.
The costs that hairdressers can claim depend on whether the business claims Flat (fixed rate) deductions or actual expenses. The costs hairdressers claim will also depend on whether they are driving a car or van and whether or not it is for private use.
Hairdressers can’t simultaneously claim capital allowances if they are claiming fixed-rate deductions. Where the business is claiming capital allowances, adjustments must be made for private use.
Things like speeding, parking, and congestion charge fines are not tax-deductible, whereas subsistence costs are tax-deductible when a meal or drink is bought during business travel.
Accommodation costs are also allowable where the travel is permissible as business travel.
Rent, rates, power, and insurance costs
Expense items in this category include costs such as chair rent, public liability insurance, and any shared utility costs of the salon.
Using a home as an office enables an allowance that can be deducted. This type of deduction is open to people who work via their home residence or use their home for business administrative purposes.
The range of costs that are possible to claim depends on whether or not the business is claiming fixed flat-rate deductions or actual costs.
Businesses can claim a flat rate with no evidence or claim a calculated proportion of expenses, including a share of:
- Mortgage interest or rent.
- Council Tax.
- Home Insurance.
- Utilities and water rates.
- Repairs and maintenance of property and equipment
Listed below are examples of small items of equipment that are eligible to claim as expenses:
- Scissors.
- Electric razors.
- Rollers.
- Straighteners and curling wands.
- Hand hairdryers.
- Hairbrushes and combs.
- Towels and non-disposable gowns for customers.
- Face visors.
These may alternatively be included as the cost of goods above. Repair costs to any equipment would also qualify.
If the business bought higher-value equipment with a two-year life or more, including chairs, heat lamps, stools, or protective screens/partitions, they would all be capitalised. Still, the business would likely get total relief under Annual Investment Allowance. Subsequently, any private use of these assets will result in an adjustment to the capital allowances that are claimed.
Phone, fax, stationery, and other office costs
The following fall under this expense category:
- Use of business and home phones.
- Cost of diary/appointment bookings.
- Pens, paper, ink, stamps, envelopes, etc. used in the business.
- Trade magazines/newsletters are used to keep the business up to date.
- Magazines bought solely for customer use whilst waiting for or during an appointment.
- Software used for the business, e.g. bookkeeping software, office software, and business apps.
- Advertising and business entertainment costs
These include:
- Online or physical advertisements in paper/magazines.
- Website hosting and maintenance costs.
- If a cash basis is not used, some website-related costs may be considered capital and, therefore, not permitted as revenue expenditure. This is likely the case where the costs create an asset of enduring benefit. Capital expenditure may be eligible for plant and machinery capital allowances.
- Interest on bank and other loans
This includes the cost of financing the purchase of business equipment or working capital.
Bank, credit card, and other financial charges
Includes bank charges or credit card charges, where they can be displayed as business-related expenses. This is proven more easily when there is an individual and separate bank account for the business. Insurance can also be claimed.
Accountancy, legal, and other professional fees
This relates to trade associations or professional body membership fees and subscriptions, such as the National Hair & Beauty Federation. As probably expected, this also includes accountancy and legal fees concerning the business.
Other business expenses
There are other areas of business expenditure that can be expensed that may have yet to be considered. Below are some examples of these:
Protective/Safety clothing, including gloves, aprons, face shields, and visors.
Laundry costs of towels, protective/safety clothing, and uniforms.
Uniform costs where staff must wear one or where a logo is present. Ordinary clothing cannot be claimed.
Staff training costs are only applicable when the business keeps skills up to date. The cost of training for a new skill or obtaining a new qualification is considered a capital cost.
Temporary signage, including laminated posters or floor stickers.
Trading and property allowance
If the total of the above costs is less than £1,000, businesses can claim the trading allowance, which is a fixed £1,000 deduction from business profits. They can claim no other expenses in this regard.
Tips and gratuities
Hairdressers often receive tips from customers in the form of cash, which is taxable. How they are taxed and whether they are subject to National Insurance depends on how they are received.
Tips and gratuities are:
- Subject to Income Tax, the only question asked is how and who collects it.
- Exempt from NIC if they are neither paid nor allocated, directly or indirectly, to employees by the employer.
- Outside of the scope for VAT where they are voluntarily given, even when collected by the employer, and irrelevant to whether they are passed on to the employees.
VAT
Hairdressing services are considered standard-rated supplies. VAT registration is essential if your taxable supplies are greater than the VAT Registration threshold for a 12-month rolling period. VAT registration can be done voluntarily too.
The Flat Rate Scheme percentage for ‘hairdressing or other beauty treatment services’ is currently 13%. This is assuming that the business is not set up as a “Limited Cost Trader”.
VAT and chair rents
Until 1 October 2012, when the supply of ‘chairs’ to other hairdressers for chair rental payments was not considered part of hairdressing supplies, it would have been potentially exempt from VAT.
From 1 October 2012, chair rents have been specifically standard-rated.
VAT: who is creating the supply?
The National Federation of Hairdressers (NFH) and HMRC have agreed to a set of guidelines for hairdressers and VAT. The guidelines detail how HMRC will make the decision on whether someone is providing services to the salon as an employee, through self-employment, or direct to the consumer.
VAT: what is the supply made up of?
Where a salon makes supplies of hairdressing services, there are three ways it may be subject to VAT.
Stylists are considered employees. The salon provides hairdressing services to the customers and must declare VAT on the gross value of that service. Payments to stylists are regarded as salary.
Stylists are self-employed and provide their services to the business. The salon receives the gross payment for their hairdressing services and then accounts for VAT on the gross amount paid. Payments to stylists are for the hairdressing services provided by them to the business.
Stylists are self-employed and contract directly with customers. The stylist receives payment of the gross amount. The business must account for VAT on gross income earned if the stylist is VAT registered. It pays the business for the use of its facilities. The business then charges VAT on its fee.
The crucial aspect will be the wording of any agreements and the arrangements applied in actual practice.
