VAT on Hairdressers Chair/Earnings

jimf123

Hi, my daughter is a self employed hairdresser. She works in a hairdressers and pays the shop owner 50% of her takings, and the rest she keeps. She has just been told that from 1st October 2012, the salon owner will still take 50% of her earnings, but on top of that she will now be charged 20% VAT on her remaining earnings.

I sort of understand the Government have "clarified" the position and are now enforcing VAT on "chair" rental and this is where the 20% stems from...

My question is, can my daughter register herself for VAT despite her low earnings, and if so, would she then be able to claim the daily 20% back as an expense when her tax returns are filed each year? Or is there another way this "expense" could be offset and maybe reduce any income tax she would have to pay?

Any advice is very much appreciated...

Many thanks..

Jim

bridgend_girl

Sorry, don't know about this scheme but I do know that if she voluntarily registers for VAT she will then have to charge her customers VAT which may then price herself out of work. She will also then have to submit quarterly returns etc.

antonic

jimf123 wrote: »

Hi, my daughter is a self employed hairdresser. She works in a hairdressers and pays the shop owner 50% of her takings, and the rest she keeps. She has just been told that from 1st October 2012, the salon owner will still take 50% of her earnings, but on top of that she will now be charged 20% VAT on her remaining earnings.

I sort of understand the Government have "clarified" the position and are now enforcing VAT on "chair" rental and this is where the 20% stems from...

My question is, can my daughter register herself for VAT despite her low earnings, and if so, would she then be able to claim the daily 20% back as an expense when her tax returns are filed each year? Or is there another way this "expense" could be offset and maybe reduce any income tax she would have to pay?

Any advice is very much appreciated...

Many thanks..

Jim

Unless your daughter is going to provide services to clients that are VAT registered then there is no point to her voluntarily registering for VAT unless her turnover is going to be £77,000.00 + when she has to register : http://www.hmrc.gov.uk/vat/start/register/when-to-register.htm also look here for more info : http://www.hmrc.gov.uk/manuals/vtaxpermanual/VTAXPER68500.htm

She cannot offset VAT against Income Tax as they are two different types of tax (as far as I know).

Hope this helps

00ec25

antonic wrote: »

She cannot offset VAT against Income Tax as they are two different types of tax (as far as I know).

Income Tax is due on the profit from her self employment business. Her business expenses have just increased by 20% therefore the rent cost she offsets against her income is now 20% higher and her profts are 20% lower.

So, yes she can offset her 20% higher costs against "income tax" but she cannot reclaim the VAT as actual cash so unfortunatley she is worse off in cash terms

as advised above voluntarily registering for VAT would almost certainly be counter productive in terms of her prices to her customers

longforgotten

Here's an example........

Say her takings are £12,000, the rent is £7200 ( £6000 + 20% VAT = £7200 ), then her profit before deducting any further expenses is £4,800.

If she registered for vat her turnover is liable to vat......she would be worse off in this example

Her takings are £12000 ( £10,000 + £2000 vat), the rent is £7,200 ( £6000 + 20% vat = £7,200 ), then her profit is £4,000 before deducting any further expenses( £10,000 less £6000). She has had to pay £800 over to the vat man ( £2000 output tax less £1200 input tax).

However if she was vat registerd and the rent was half of her turnover after the deduction of vat .........Takings £12,000 ( £10000 + vat £2000) less rent £6000 ( £5000 + vat £1000), her profit would be £5000 before the deduction of any further exps.

Have a play around with the figures.

Also she would be able to claim back the input tax on the expenses, but it may still not be worth registering for vat for the hassle of the vat returns.

JasonLVC

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_PublicNoticesAndInfoSheets&propertyType=document&columns=1&id=HMCE_PROD1_032285

Link above is to HMRC's latest explanation of the changes relating to chair rental schemes.


I'm not sure if I understand the original question asked or if it has been re-told correctly by the OP. If I can repeat the bit I'm concerned about :-

"She works in a hairdressers and pays the shop owner 50% of her takings, and the rest she keeps. She has just been told that from 1st October 2012, the salon owner will still take 50% of her earnings, but on top of that she will now be charged 20% VAT on her remaining earnings."

Under the old chair rental scheme, the stylist was self employed and 'rented' a chair within a salon. The rental was based on a percentage of income generated by the stylist, thus if the agreement was 50%, then the salon owner got 50% of the stylists income. This was VAT exempt (no VAT) so the salon owner never needed to register for VAT as he only had exempt income of rent. The stylists didn't need to register for VAT either as most of them never turnover more than the VAT registrtion limit of £77k per year.

The only change in law is that the rental of chairs is no longer exempt. It is standard rated now/from October 2012. So what should happen is the 50% charge to the salon owner is now subject to VAT. Remember, the only thing the salon owner is supplying here is the salon space to the stylist. The "rent" cost for that space is flexibile based on turnover of the stylist. If stylist earns £20k then 50% of it is rent to the salon owner. If stylist earns Nil, there is Nil rent to pay.

For example, if stylist earned £1k a month, they owe £500 to the salon owner for 'rent'. The salon owner in theory raises an invoice to the stylist based on the sales figures reported to him by the stylist. The salon owner would want that invoice either as VAT inclusive - thus salon owner gets £500 from stylist but he pays £83.33 of that as VAT over to HMRC so salon owner really only gets to keep £416.67 - or if I was the owner, I'd want the 50% cut as "plus VAT" thus is paid £500 (which is 50% of takings) + £100 VAT (total £600). So stylist has to pay £600 to the salon owner, including the VAT. The effect of the law changes means the salon owner has to charge VAT to the stylist for his cut of the takings and the stylist now has to pay an extra £100 as a result of the owner charging rent plus VAT on top.

Think of it like you renting a council house for £500 p/month, all of a sudden the law changes and the landlord now has to charge you £600 p/month. Nothing has changed except the extra £100 which the landlord has to pay over to HMRC, so landlord is still only getting £500, but tenant is out of pocket.

But this is all just focused on the salon owners 50% cut. The owner has no entitlement to the other 50% earnt by the stylist as it belongs to the stylist. Now, if the salon owner is saying the other 50% income is subject to 20% then I cannot see how that is possible, the other 50% is not the salon owners income, it is the self-employed individuals income. If the individual wants to register for VAT and charge VAT onto customers that's upto them.

If the salon owner wants the self-employed stylist to declare 20% VAT on the stylists 50% share then it sounds like the self-employed stylist is actually an employee and ALL income from all the stylists is the income of the salon owner and is for the salon owner to declare VAT on all those sales/hair cuts.

VAT is a charge on a supply of a good or service. The salon owner provides a salon and charges the stylist VAT for that right. What is the salon owner providing to get 20% of the stylists half of income. It's not the salon owners income, its the stylists!

Sounds wrong to me, you need to get some proper advice or if you can clarify exactly what is happening (ie, what is being charged by whom for what) then I can help some more.

Firefox1975

Pretty Shrewd move on behalf of HMRC.

They will also now know your daughters income for the year so no mistakes on the Tax return eh?