Reclaiming VAT, when and how does it work?

jacquit_3

JasonLVC wrote: »

Hairdressing is NOT zero rated - far from it!. It is VATable and if you do register for VAT you'd have to charge VAT on your services.

Most hairdressers operate a kind of tax planning/legalish VAT avoidance known as a 'chair rental' scheme whereby the owner of the salon 'rents' chair space to the stylists who pay the owner (landlord) rent for using the chair and providing facilities like a sink, mirror, etc.

The VAT rate of rent is exempt (so no VAT is charged on rent but no VAT on expenditure is recalimable either) but it doesn't count towards the VAT registration limit so you could have 8 stylistys each paying you £20k per year thus earn £160k on pure rental alone and not need to register for VAT - so your business would be rental of chairs instead of hair dressing so to speak.

The stylists would then keep whatever taking they get from the customers with maybe a small 'service charge you also bill them for, for eletricty, etc (but is another way of getting a small % of their income under the auspices of rent).

That's how more or less all hairdressing salons manage to survive in the marketplace - talk to your accountant and also visit the hairdressers 'association' website (can't remember what it is called though, sorry)

Does it work the same way if the stylist is self employed on a split percentage basis? ie they keep 50% and the salon keeps 50%? Would the salon need to pay VAT on just their percentage or not at all?

Thanks
Jacqui

JasonLVC

Jacqui,

Probably wouldn't work. The chair rental scheme only works becuase it focus' on a little nuance within the VAT legislation. The salon owner is not providing haircuts at all, he is simply a landlord renting a chair in a building that just happens to do haircuts.

In your scenario, the stylist is simply splitting their income 50/50 and when you ask what was the income for it is for hair cuts/styling. The trick to getting the chair rental to work is that the salon owner/landlord has little or no control over the stylists in terms of annual leave, sick pay, etc - thus proving the owner really is JUST renting chairs. If we have a 50/50 type arrangement it becomes more apparent that the relationship between the two parties is more a splitting of costs rather than of distinct services (one of styling and one of rental).

As the rental would have to be fixed it therefore cannot be rental if it is based upon takings of the stylist. I trust you see what I mean.

Here's some links which will explain it better than me! :-

http://www.hji.co.uk/blogs/business/2007/04/chair-rental.html

and

http://www.salongeek.com/biz-geek/62995-whats-required-50-50-rent-chair.html

and finally
http://www.accountingweb.co.uk/common/partners/parkes/demo/hair/hot2.htm

Basically, it is all about reducing the salon's turnover to below the VAT limit, rather than being there to help the individual stylist.

jacquit_3

Thanks for that, you're explanation makes perfect sense! :T It's an absolute minefield all this business lark

Jacqui