T: 0131 341 4250|E: andrew@salonfrog.com
T: 0131 341 4250|E: andrew@salonfrog.com
If HMRC come a knocking, what’s the top things they’ll look at, and how (as a salon owner) are you protected?
We’ve put together a summary below on how Salonfrog’s Clients protect themselves with our help; and it is definitely worth making sure that you have the same controls in place:
| What HMRC will investigate:————————— | What HMRC is after:———————————— |
Your controls: How you protect yourself from HMRC——————————————————————- |
| 1. Income | Are you declaring all your income for tax? | i. All your Client sales go through a POS system, which salonfrog independently pulls in to your accounting software.
————— |
| ii. Rental income from your self-employed are invoiced independently by Salonfrog.
————— |
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| iii. All income and expenditure is through your business bank account, which Salonfrog independently reconciles to your accounting system.
————— |
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| ————————— | ———————————— | ——————————————————————- |
| 2. Expenditure | Are you overstating your business allowable expenses? | v. Only business expenditure is paid for through your business bank account.
————— |
| iv. All expenditure is supported by adequate paperwork (i.e. you scan every bill into hubdoc), which Salonfrog attaches to the expense in your accounting system.
————— |
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| iii. All income and expenditure is through your business bank account, which Salonfrog independently reconciles to your accounting system. | ||
| ————————— | ———————————— | ——————————————————————- |
| 3. Payroll | Are you reporting employee wages via RTI (PAYE)? |
vi. All your staff are paid via your payroll system, which Salonfrog independently runs for you; and reports to HMRC via RTI.
————— |
| Are you paying them minimum wage? Big fines if not. |
vii. Staff wages are only paid from your business bank account.
————— |
|
| Are you auto enrolling them when you should do? |
iii. All income and expenditure is through your business bank account, which Salonfrog independently reconciles to your accounting system.
————— |
|
| Are tips being declared and tax paid on them? | xi. Both you, and salonfrog check minimum wages every pay period.
————— |
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| xii. Salonfrog independently assesses each employee, every month, to ensure they are correctly enrolled, and paying in the legal amount.
————— xiii. You have a Tips Policy, which all staff have signed. Further advice here: https://salonfrog.com/2021/09/29/tips-hmrc-getting-firmer-with-a-new-employment-bill/ |
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| ————————— | ———————————— | ——————————————————————- |
| 4. Self employed
(chair and space renters) |
Are your self employed actually employees? |
xi. Salonfrog specialises in understanding the salon rental business, the related legislation, and follow HMRC attacks against salons through the courts; then keep you up-to-date with the latest.
————— |
| viii. You have up-to-date contracts with all your self employed; the terms of which are actually followed in real life (e.g. they can come and go as they please). You follow the NHBF/HMRC self employed guidance points (which Salonfrog has distrubuted) and can be found at: https://www.gov.uk/hmrc-internal-manuals/vat-taxable-person/vtaxper69100 ————— |
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| ii. Rental income from your self-employed are invoiced independently by Salonfrog. | ||
| ————————— | ———————————— | ——————————————————————- |
| 5.VAT | Are you under-reporting the VAT you owe? |
ix. Salonfrog ensures that the VAT relating to all income and expediture is correctly accounted within your accounting system; and that a VAT return is submitted on time to HMRC.
————— |
| iii. All income and expenditure is through your business bank account, which Salonfrog independently reconciles to your accounting system.
————— |
||
| iv. All expenditure is supported by adequate paperwork (i.e. you scan every bill into hubdoc) which Salonfrog attaches to the expense in your accounting system.
————— |
||
| v. Only business expenditure is paid for through your business bank account. | ||
| ————————— | ———————————— | ——————————————————————- |
| 6.MTD VAT | Are you MTD compliant? | x. Salonfrog ensures that you are MTD compliant for VAT; especially that there is the required end-to-end digital link in your accounting systems; and that your VAT return is submitted via MTD approved software. |
| ————————— | ———————————— | ——————————————————————- |
| 7. Records | That you keep a copy of all your records for the minimum required time? |
There are different requirements for different records, for example: for a Ltd company, you must keep records for 6 years from the end of the last company financial year they relate to.
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| Salonfrog keeps all your records for the time you’re with us.
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We don’t keep your records from before you joined us though, so make sure you keep these safe.
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National insurance contributions and dividend tax rates will increase by 1.25 percentage points across the whole UK from 01 April 2022.
The effect | Summary
1. Employees
Those of your staff earning above £9,568 (2021/22 rates) will have 1.25% more NI deducted from their pay packets.
So a stylist earning £18,000 pa will be £105 worse off per year.
2. Salon Owners (as employers)
For each of your employees earning above the class 1 secondary threshold (currently £8,840 in 2021/22), it will cost you an additional 1.25% class 1 secondary NIC.
So one of your stylists earning £18,000 pa will cost you another £114.50 per year.
For most of you, the first £4,000 of your employers NI is free (for our Clients we claim this for them).
Dividends
On top of the employers NI, you will also pay an additional 1.25% income tax on any dividends you take from your business from 01 April 2022; taking rates to: 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.
3. Self employed (chair/space renters)
Those renters with profits above £9,568 (2021/22 rates) will pay an additional 1.25% class 4 (self-employed) national insurance.
Then from 01 April 2023.
From April 2023, the increases will be legislated separately as a “health and social care levy” and NIC rates will return to 2021/22 levels (so you’ll pay NI as usual but have an additional ‘health’ tax to pay of an equivalent amount.
Heading out of lockdown, and with the safe haven (for your employees) of furlough coming to an end, we’re seeing an increase in staff leaving salons. It happens. For whatever reason. And here’s a checklist of what you need to do as soon as it does:
Part 1. Financial Control & Information Security
Part 2. Look after your clients and staff:
8. Make sure you contact the stylist’s clients asap
Have a positive story ready, keeping it up beat, and letting them know who will be taking over (giving a short paragraph about them); and that you’re really looking forward to seeing them at their next appointment.
9. Ensure your staff are on board
Give all your staff a clear sentence or two to say if anyone asks about the stylist who has left. Again, make it a positive message and be clear to your staff that there should be no gossiping with their Clients!
10. Monitor the stylist’s Clients
Some of their clients may well go with the stylist but you still have their contact details, so keep them on any marketing emails. They may well return!
11. Find out why the stylist is leaving
The more information you can glimmer when someone leaves, the better. Ask them 2 things:
i. why they are leaving (but probe, as it’s not always the first thing they say which is the real reason!)
ii. what do they think the salon could be doing better (don’t be defensive – just reflect later on what they say as they may well have a point and maybe discuss it with your more trusted stylists)
Sunak’s additional one-off grant announced yesterday will be open to all salons forced to close and the amount will be based on the rateable value of your salon as this:
You must apply to your local authority to get this.
This one off-grant is in addition to the existing LA grants salon owners have already received.
This new grant covers you to 3 March when Sunak will “take stock of our wider support, and set out the next stage in our economic response”.
The grant is on a per-property basis, so apply separately for each salon you have.
It applies to ALL the UK. So Scotland as well as England.
Self employed
The last line of the government press release also highlighted an extension of the Self Employment Income Support Scheme, but no further details were given on that nor any support for those that don’t qualify for SEISS.
A longer read than usual for one of our posts but Nicholas Macpherson, former permanent secretary to three chancellors, hits the nail on the head, just like tax is going to hit us all in the pocket to pay for furlough in the not too distant future…
Nicholas Macpherson:
Taxes are going to have to rise.
As with war, the immediate cost of the coronavirus can be financed by borrowing. But as and when we return to normal times, the government will need to set out a plan which stabilises and then reduces public sector debt as a share of national income.
The problem is public expectations of healthcare are rising. Voters will expect greater spare capacity to guard against future pandemics and they will demand better care homes. Demographic pressures on spending are already on the rise. And Mr Johnson’s government has shown little interest in public expenditure control: it was elected on a platform of ending ‘austerity’.
My guess is that taxes will have to rise by at least £50bn a year. The question is how?
I worked on two major fiscal consolidations when I was at the Treasury: 1992–93 and 2010–12.
The first lesson I learnt is that tax reform and tax increases are difficult to reconcile. Extending VAT to domestic fuel in the early 1990s led to an almighty row and government defeat. Similarly, George Osborne had little difficulty raising an extra £13bn by raising the VAT rate from 17.5% to 20%, but he found it impossible to raise £100m by extending VAT to pasties and holiday caravans. It’s better to leave tax reform to the good times when you can lower the rate while extending the base, as Nigel Lawson demonstrated in the 1980s.
The second lesson is that introducing small new taxes can help, but if they are not to cause upset the government should not push them too far. Airport passenger duty and insurance premium tax have been nice little earners. But the revenue they raised initially was in millions not billions. Everybody is in favour of a carbon tax in principle, until they have to pay a higher price at the pump or on their fuel bills. There’s a wider point about tax acceptability: push a tax too far, as New Labour did with council tax and the fuel duty escalator, and you spend many years repenting at leisure as you freeze the tax.
The third lesson is about fairness. Voters won’t tolerate openly regressive taxes like the so-called community charge or poll tax. But at the same time, you won’t raise serious money by soaking the rich. It’s tempting to think that the rich and the companies they own can bear the burden of higher taxes. They won’t. Capital is mobile. Tax it more and it tends to move elsewhere. It’s irritating that digital companies operate out of Luxembourg or Ireland but, the United States apart, governments are never going to extract serious revenue from them. The same can be said of the rich. President Hollande’s tax hike in 2012 merely led to an exodus of the affluent, many of whom came to London.
Taxing wealth is tempting. But wealth taxes rarely raise much revenue, once the inevitable exemption for housing is introduced. And experience suggests that people will go to extraordinary lengths to avoid inheritance tax.
There’s a good case in principle for taxing land – after all, it doesn’t move. But the politics of property taxation are notoriously difficult. All the chancellors I worked for worried about the asset rich but income poor widow. And it is no coincidence that there hasn’t been a revaluation of council tax in 30 years. I much admired the Irish reform of reducing stamp duty rates and introducing a self-assessed property tax. Stamp duty rates are too high and discourage mobility. But I can’t see it happening here. And even if it did, it would be more likely to take the form of a revenue neutral package than as a serious tax raiser.
That does not mean the government should do nothing in these areas. Corporation tax rates were probably reduced too far too fast. And there’s a good case for higher tax rates on capital gains, though economists tend to overestimate the likely yield: experience suggests if you wait long enough a government is elected which will tax your gains at a much lower rate. It’s worth looking again at pensions tax relief though this is already constrained and fiendishly complicated. The government might also consider more council tax bands, though in the absence of a revaluation it might be difficult to make these stick. But measures like these will raise billions rather than tens of billions.
That takes me to the final lesson I learnt. If you need to raise serious revenue, there is no substitute for raising the main rate of one of the big taxes. There is a reason why income tax, national insurance and VAT account for the vast majority of tax revenue. They are easy to collect and they are paid by most of the population.
The problem, in the short run at least, is the government made a manifesto commitment not to raise the rates of these taxes.
Here, the solution is simple. Introduce a new tax: a ‘temporary’ social solidarity charge. It would be modelled on national insurance and based on ability to pay, but unlike NICs it would be paid by old as well as young, and on pension, dividend and rental income as well as earnings. Unlike income tax, there would be no reliefs, and so with the broadest possible base the increase in tax rates could be kept to the minimum.
The new charge could be sold as a way of spending more on health and social care. I’m under no illusion. It won’t be popular. Taxes never are. Sometimes, you have to raise taxes to recreate a coalition for lower spending. The pendulum will swing.
If your insurance company said you were not covered for Coronavirus under your policy, this is of great interest.
The Financial Conduct Authority (FCA) has brought a case on behalf of a number of UK businesses who’s insurance companies had said they were not ‘covered’ for Covid-19.
The FCA argued that policies which cover firms for business interruption from ‘infectious’ or ‘notifiable’ diseases should pay out for COVID-19 disruption. Similarly, it argued that firms with clauses such as “denial of access” or “public authority closures or restrictions” should also be eligible for payouts.
Yahoo Finance! reported also that: “Around 370,000 firms could be affected by Tuesday’s ruling, which is part of a test case looking at key issues around firms’ entitlements to payouts over the impact of the government-imposed lockdown.”
Mel Stride, Conservative MP and chair of the Treasury Committee added that “This ruling will provide hope for many businesses that have been put through the mill whilst seeking insurance payouts.” However he added: “the devil will be in the detail”.
Following the court decision, Christopher Woolard of the FCA said: “We are pleased that the court has substantially found in favour of the arguments we presented on the majority of the key issues…” adding: “Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat.”
If you have been refused Covid-19 related business interruption by your insurance company?
Go back to them quoting this test case and ask them to revisit your claim eligibility:
https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-judgment.pdf
The scheme, launched today 02 Sep 20 is now open for employers to apply, but this is unlikely to work for most salons in the UK because you need to be offering at least 30 work placements.
However, for the larger salons in the UK, key points are:
See more here:
Shine Bright has just launched!
Salonfrog has worked with Claire and Diane, the lovely people at Shine, for a while now and watched this new offering coming together: a package of services exclusively for business owners in the Hair & Beauty industry.
It’s also great because for a monthly subscription, you have access to all their services:
⭐Training
⭐Toolkits
⭐Expert Speakers
⭐1-2-1 Coaching
And a lot more.
We never promote other businesses unless we really believe they’re a good fit for our own Clients, never mind recommending them 🙂
Heads up: join now for a big discount!
The people at Shine are selling the first lot of subscriptions at a massive discount of £19 per month (instead of the usual £47) but only if you sign up in the next few days. Well worth it!
More detail here:
Here’s a thing: What do successful Salon Owners do all day?
Andrew from Salonfrog presented his answer to this in a 30 minutes facebook-live yesterday with Shine from the Orbit Agency.
“Excellent and genuinely practical advice. Thank you! I feel encouraged and motivated.”
was just one of the comments from the Group after the session. Great to hear it helped!
Head over to the Shine facebook group to watch!
The IR35 tax rules have been confusing everyone for a few years now and with the new OPW “off-payroll working” changes now being delayed (thanks to COVID-19) until April 2021, we look to clarify how either apply to Salons where they have self employed businesses working in them (whether through chair renting, space renting, contracting or income splitting).
Before you read on, this is important!
Neither IR35 nor OPW are likely to apply to your salon, because neither rules apply to:
- Self employed contractors
- Self employed contractors supplied by a temp agency (who would pay them via their own PAYE)
- Contractors who have a contract of employment with an umbrella company (who would pay them via their own PAYE)
However, HMRC can still attack self employed set ups in different ways, other than IR35 & OPW. Read on…
Whats HMRC’s beef?
HMRC are looking for disguised employment. In other words, the person in your salon is (for all intents and purposes) really your employee – whether you’re treating them as that or not.
IR35?
The IR35 tax rules (previously known as the “employment intermediaries” rules) apply when a “worker” in your salon supplies their services via a “controlled” 3rd party (which includes a ‘personal service company’ PSC, partnership, or even another individual).
OPW?
Currently looks for an IR35 situation within the public sector; but from April 2021 now includes it within the private sector.
How might this apply to salon owners?
By using a PSC, a self employed stylist opens up the tax advantages of a Ltd company and HMRC doesn’t like this because it knows it means less tax and national insurance can be collected from that person.
As an example: a stylists works in your salon, barbershop, or spa but you pay them via their Ltd company (one that they have set up), rather than pay them directly (as you would do an employee, or self employed person).
Another example is where you have an income splitting arrangement with a stylist, but the contract is between your salon and a Ltd company (one that they have set up) and you treat them as self employed.
The Ltd company that they have set up could be deemed a personal service companies “PSC” by HMRC.
How does HMRC use IR35 & OPW?
HMRC applies IR35 & OPW rules in cases where they consider a person is “hiding” behind a PSC but is for all intents and purposes really an employee, or self employed individual.
Once HMRC get a whiff of this set up, they simply compare the person’s set up in practice against its own employment status test and if the person fails, they consider them an employee.
The consequence is that HMRC would then go after the person behind the PSC for income tax and NIC owed.
At the moment, the burden is on the person behind the PSC (this being the person HMRC would go after) but things are about to change…
From April 2021
From April 2021, the onus to check the employment status of any possible IR35 situation and possibly who will need to back pay the PAYE moves to the ‘end Client’ – i.e. the salon owner; but for now, this only applies to medium and large sized businesses only. For small businesses (like most salons), the onus remains with the PSC, at least for now anyway.
‘Small’ is defined as: 50 or less employees, turnover is less than £10.2million and their balance sheet shows £5.1million or less.
So pretty much all independent salons are exempt at the moment.
Should salon owners be worried then?
For the vast majority of Salon owners, IR35 & OPW should not be a worry, for at least 1 of 2 reasons:
- it only applies if the salon has a contract in place (either in writing or in practice) with a PSC (for example a ‘rent a chair’ arrangement with an individual using a LTD company themselves;
- it doesn’t apply to small businesses (ie. you’re exempt as you have less than 50 employees, your turnover is less than £10.2million and your balance sheet assets are less than £5.1million).
But watch out for self employed individuals who don’t have a PSC
Although similar (but different to IR35 or OPW) the more likely risk salon owners face is with their chair renters.
Where HMRC find that your self employed individuals should actually be treated as employees, they will go after the salon owner for PAYE & NIC, backdated to when the individual started working in your salon.
You can check each of your self employed individuals by running them through the online HMRC CEST test (link below).
Print off the results and HMRC say they will abide by them.
In conclusion
As the NHF states: “During the Queen’s Speech Boris Johnson gave an early indication that the government is concerned that the rising rates of self-employment across many sectors, including hair, barbering and beauty, could come at a cost for the government and taxpayers in lost revenues.”
And we know that Johnson recently said: “We will increase fairness and flexibility in the labour market by stopping employers and workers experiencing significantly different outcomes from flexible forms of working.”
It’s an issue that the government has being trying to attack for years – and we’ve been following their attempts very carefully.
We continue to watch this space!
Further reading
More info from HMRC can be found here:
HMRC’s CEST test can be found here: