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.
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).
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.
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!
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
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
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
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.
Employment Allowance EA
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
From April, the national living wage increases.
See more here: Minimum wage increases.
National Insurance limits increase
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
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.
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.
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.
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 🙂
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.
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.
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.
NIC limits and thresholds for 2020/21 have been announced and draft regulations have been put to Parliament. When passed, they come into effect from 6 April 2020.
The good news is that the Class 1 primary threshold (where your staff start to pay NI) and the Class 4 lower profits limits (where self employed people start to pay NI) will increase significantly – reducing the amount payable.
The upper limits remain unchanged and all other thresholds will see an inflationary increase only.
The above inflation increase in the primary threshold and the lower profits limit is a step towards the government’s ambition to raise these amounts to £12,500 – in line with your personal tax allowance (the amount above which you start paying income tax).
Summary of increases 2019/20 -> 2020/21
LEL £6,136 -> £6,240
Primary Threshold £8,632 -> £9,500
Secondary threshold £8,632 per year -> £8,788 per year
Upper earnings limit remains at £50,000
Weekly amount £3.00 -> £3.05
Small profits threshold £6,365 -> £6,475
LEL £8,632 per year -> £9,500 per year
Upper profits limit remains at £50,000
The employment rights regulations that bring in the 52-week reference period for annual leave calculations (read more here) will also bring into force a ‘day-one right’ to written particulars of employment.
What are the Employment Particulars?
An employer must give employees a ‘written statement of employment particulars’ if their employment contract lasts at least a month or more. This is a different document to the employee’s standard employment contract, although it will include the main conditions of employment.
The regulations give a requirement to include:
Points to note
Currently, the written statement of particulars of employment is required to be provided to employees within two months of the employment start date for employees who have worked for more than one month.
From 6 April 2020, the written statement of particulars will be extended to all workers, which will now include those sometimes referred to as ‘Limb B’ workers, for example workers in the gig economy.
This has no bearing on self employed room/chair renters since they.
Go here for more information on the written statement of employment particulars.
Holiday pay has been the subject of many employment tribunals in recent years and as a result of much lobbying (and the Matthew Taylor review), the reference period for calculating holiday pay is to be extended from 12 weeks to 52 weeks – the aim to provide a more accurate reflection of average pay for the purposes of holiday pay.
The employment rights (employment particulars and paid annual leave) (amendment) regulations 2018 will bring this change into force from 6 April 2020.
A couple of points:
Where the employee has been in employment for fewer than 52 weeks, the reference period will be the number of weeks that the employee has been employed.
Working back over the 52 weeks, where a week saw no payment because the employee did not work, the preceding week of work and pay should be used. Once the 52-week reference period comes in to force, the maximum period that the employer should go back will be 104 weeks, before the beginning of the period of leave.
If you are one of our Clients, we will be looking at incorporating this change for you.
You can read more about this are in our earlier article: Holiday Pay | it can be tricky for some and the rules are changing
On the last day of 2019, the government confirmed that the national living wage for over-25s would increase from £8.21 an hour to £8.72 from the start of April 2020.
Rates will also rise across all other age groups, including:
If you have self employed individuals in your salon or barbershop (for example chair renters or room renters, or even use contract staff), this is an important update from HMRC for you.
HMRC has just enhanced its CEST tool and published new guidance notes intended to provide users with greater clarity on the factors used to decide if someone really is self employed or not for tax and NIC purposes.
HMRC developed some time ago a tool which you can use to check whether anyone who you consider as self employed in your salon or barbershop, really would be considered the same by HMRC.
If HMRC considers a self-employed person to actually be employed, they can look to you as salon owner for PAYE and NI back pay, as well as possible fines.
The CEST tool has just been enhanced and includes more questions than the previous version, including:
It also contains more links to HMRC guidance.
Salonfrog tried it
We’ve tried running it for a few scenarios specific to chair and room renters and often we got a result of ‘self employed’. However, the tool’s decision often sited the reason for this because “they will have to fund costs before your client pays you” and also in one of the critical questions there was no option to say that all the income was that of the self employed person and that they simply paid a flat rate rent to the salon.
Run it for each of your self employed people
We strongly recommend you run the tool for each of your self employed people as HMRC say they will stand by the tool’s decision! Once you run it, you have the option to save the results as a PDF, which you should do.