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.
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| 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.
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|
| 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.
————— |
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| 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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| 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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Tips!
We let you know last year that a new Employment Bill would be heading our way; and the latest news is that it’s coming.
It include measures that ensure tips, gratuities and service charges must ALL go to your stylists in full.
The new law will mean that:
• You will not be able to make any deductions from tips received by your staff;
• You will be required to distribute tips through a fair and transparent process;
• There must be a written policy on tips, and records retained to show how tips have been dealt with;
• You may use a tronc to distribute tips and they must be dealt with no later than the end of the month following the month it was paid by a client;
• Your staff will be able to request information relating to an employer’s tipping record;
• You will have to comply with the new statutory Code of Practice on Tipping.
Where employers fail to comply with these measures, they can be taken to Employment Tribunal by their staff.
The Employment Bill will be brought forward when Parliamentary time allows, and it is expected the rules will commence no earlier than one year after the Bill has passed, so you have plenty of time to get anything set up.
Even if you don’t get involved with tips (and sensibly leave it as a client-stylist transaction, you should still ensure you have a written policy on tips which all of your staff should sign to say they have read it.
Here’s an article we wrote around tips that would be worth reading, even if you don’t think you get involved with them.
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.
139 companies around the UK, including some hair & beauty salons, are being named and shamed today for failing to pay their workers the minimum wage.
Those that were found not to have complied with the minimum wage (£4.15 an hour for apprentices and up to £8.72 for the over-25s) have been ordered to back-pay what they owe to their staff (at current pay rates), as well as all taxes due on these underpayments.
They are also being fined (up to 200% of arrears – capped at £10,000 per worker) as well as name and shamed!
This is the first time the government has named and shamed companies for failing to pay National Minimum Wage since 2018 and shows how seriously HMRC are taking the issue.
While not all breaches of minimum wage rules are intentional, it is the responsibility of all employers to ensure they are following the law.
Salons often get caught out where they pay their staff on a commission-only basis. On a quiet month the stylist’s pay can work out at less than minimum pay when you look at how many hours they’re in the salon for.
The other main causes of minimum wage breaches is around your salon’s lower-paid employees being made to cover work costs, such as paying for their own uniform, their own training or tips they receive being counted as ‘pay’ when it shouldn’t.
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:
The 6th April kicks off a new tax year 2020/21 for income tax.
We look at some of the key changes that might affect salon and spa owners:
Have a property you rent out?
If you rent out a residential property (a lot of our Clients also have a rental property business as well as their salon), there are 3 key changes from April 2020:
1a. 30 day payment and reporting
Bad news
If you sell a residential property, you now need to report the capital gains tax (CGT) you made 30 days from the date of completion of the disposal (this didn’t used to be until the deadline of 31 January following the end of the tax year).
It means you have to pay any tax due a lot earlier than before.
1b. final period exemption
Bad news
There is a reduction in the final period exemption from 18 months to 9 months (the period where you can ignore any capital gains when you make a disposal of a rental property).
It means you have to pay more tax on the disposal.
1c. Finance costs
Bad news
The transitional rules for mortgage interest relief for individual landlords (introduced from April 2017) will finally end on 5 April 2020. Which means that the buy-to-let mortgage interest relief will be 20% of the lower of:
Any excess interest instead will be carried forward to be included in the calculation for the next tax year.
Employ staff?
Employment Allowance EA
Good news
For most of our Clients, they do not have to pay the first £3,000 of employers national insurance each year under what is known as the employment allowance. For this tax year, the EA has increased from £3,000 to £4,000. Which means your payroll costs reduce.
Minimum wage levels increase
Bad news
From April, the national living wage increases.
See more here: Minimum wage increases.
National Insurance limits increase
Good news
From April, an increase in the threshold where employees and employers start paying national insurance increases.
See more here: NI limits and thresholds for 2020/21
Inheritance tax
Good news
The inheritance tax (IHT) residence nil rate band is increased to £175,000 from 6 April 2020. Taken together with the existing IHT nil rate band, an individual taxpayer will be able to leave an estate of up to £500,000 without paying IHT.
This post has now been replaced by our Coronavirus page:
The Budget was delivered today (11 March 2020) by the Chancellor Rishi Sunak (only a month into his new job) and the first Budget since Philip Hammond gave his fourth and last Budget in October 2018.
This 2020 one then, delivered at a time of much uncertainty and in the wake of a looming coronavirus threat, Sunak had a very positive tone, insisting that “any problems [it] creates would be short-term and would be dealt with”, while the “UK’s medium to longer term outlook is very positive”.
Here are the key points for salon and spa owners:
SSP and COVID-19 Corona Virus
The Budget announces measures surrounding COVID-19.
Employees will receive SSP from day 1 if they either have COVID-19 or have self-isolated because of it (rather than from day 4 with all other sicknesses).
Employers cannot currently reclaim SSP back from the Government, however they will now be able to do so if the SSP is paid to an employee who has COVID-19 or has self-isolated because of it.
Here are the rules:
The government has already issued guidance to employers, advising them to use their discretion not to require a GP fit note for COVID-19 related absences. This Budget announces that the government and the NHS will bring forward a temporary alternative to the fit note in the coming weeks which can be used for the duration of the COVID-19 outbreak. This system will enable people who are advised to self-isolate to obtain a notification via NHS111 which they can use as evidence for absence from work, where necessary.
National Insurance thresholds
Good news for salon owners, their staff and self employed chair/space renters
The budget confirmed the expected increase in the thresholds at which employees and the self-employed start paying National Insurance contributions (NICs) to £9,500 from April 2020.
Around 1.1 million people will be taken out of paying Class 1 (employed) and Class 4 (self employed) NICs entirely. This is the first step in meeting the government’s ambition to increase these thresholds to £12,500, which would save a typical employee over £450 per year.
Employer NICs
Good news for salon owners
Currently, the first £3,000 of Employers NIC is free each year. The budget has increased this to £4,000 from April.
This effectively reduces a salon owner’s staff cost by £1,000 per year.
Business rates
Good news for salon owners
From 1 April 2020, the business rates retail discount for properties with a rateable value below £51,000 in England will increase from one third to 50%. On top of this, to support small businesses in response to Covid-19 the retail discount will be increased to 100%.
We await to see if Scotland and Wales follow.
The government is launching a fundamental review of business rates to report in the autumn. The Terms of Reference for this review are published alongside this Budget and a call for evidence will be published in the spring.
Pension tax
Good news for your staff
Those earning around or below the level of the personal allowance £12,500 and saving into a pension (most likely through auto enrolment) don’t currently always receive tax relief in the same way those earning more do: it all depends on how their pension scheme administers tax relief.
The government has committed to reviewing options for addressing these differences and will shortly publish a call for evidence on pensions tax relief administration.
Capital Gains Tax
Bad news for salon owners
From 11 March 2020, the lifetime limit on gains eligible for Entrepreneurs’ Relief ER (which offers a reduced 10% rate of Capital Gains Tax when you sell your business for example) will be reduced from £10 million to £1 million, in response to evidence that it has done little to incentivise entrepreneurial activity and that most of the benefit accrues to a small number of very affluent taxpayers.
Given that salon owners include ER in their exit/retirement strategy, this could be bad news. Although for most, I think there will be no difference and a £1m limit might be quite adequate 🙂
Corporation tax
Bad news for salon owners
Corporation tax remains at 19% (despite it being promised 3 years ago to fall to 17% from April 2020).
Individual Savings Account (ISA) annual subscription limit
Good news for salon owners, their staff and self employed chair/space renters who have (or want to open an ISA)
The adult ISA annual subscription limit for 2020-21 will remain unchanged at £20,000.
However, Junior ISA and Child Trust Fund annual subscription limit – The annual subscription limit for Junior ISAs and Child Trust Funds will be increased from £4,368 to £9,000.
MTD
Good news for salon owners, their staff and self employed chair/space renters
The government have decided to publish an evaluation of how MTD for VAT went before kicking off phase 2. This is most welcome. We’re not sure business has fully recovered from this initial debacle yet.
IR35
Named after the press release that originally brought the legislation in (and not such a big issue to the majority of Salon owners, see why here), the new IR35 rules are going ahead from next month. More importantly, it maybe a taster of how these rules (purely aimed at where a Ltd co sits between the worker and the salon’s Ltd co) may spill into the very popular self-employed stylist/salon arrangement. We continue to see…
HMRC has advised that: because income tax thresholds and rates will now not be finalised until March, tax codes for 2020/21 will have to be initially calculated using 2019/20 rates and then revised as necessary after the budget.
In other words, your staff may have the wrong tax deducted as part of the PAYE process in April 2020, but this will be automatically corrected during the next one or two pay runs as HMRC issue their new codes.