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Tax Advice

The Green Party plan to raise corporation tax

In the latest 2019 election promises, the Green Party has pledged to invest £100bn a year to fund its climate policy over the next decade, if it wins the election.

They say that the bulk (£91.2bn a year) would come from borrowing, with the rest from tax ‘changes’.

One of these tax changes would be a rise in corporation tax (the tax Ltd companies pay on their profits each year) from the current 19% to 24%.

The 19% rate is due to fall to 17% from April next year, so the Green’s increase  would be a double whammy for Salon and barbershop owners.

So from a financial point of view only, not great.

Promised tax cuts in next month’s budget scrapped

Chancellor Sajid Javid is planning to scrap promised tax cuts in next month’s budget, according to a report in the Financial Times.

This Tuesday’s U.K. public-sector borrowing figures showed the budget deficit between April and September totalled £40.3b, 22% higher than the same period last year.

The FT says that as a result of the tightening economic realities, Boris Johnson’s promise to cut tax for those earning over £50,000 is expected to be scrapped (his plan was to move the higher rate tax band from £50,000 to £80,000) as it is now thought to cost the Treasury £8b.

Other tax breaks in areas such as Inheritance Tax and Death Duties are also expected to be jettisoned.

Tips!

Introduction 

It’s always great when your Client is good enough to pay a tip on top of the price of the service they’ve just received!

In this Article we look at both the income tax and national insurance aspects of tips – for both the Salon/Barbershop Owner and their employees. 

It’s not as easy as you’d think 

HMRC consider that an employee should pay tax on any tips they receive. Easy so far. 

However there are a number of ways in which a tip could be handled before ending up in the hands of the Stylist – and it is this route which determines whether the tip is subject to National Insurance Contributions (NICs), whether they are subject to Income Tax (PAYE) and whether it is the Salon or Barbershop Owner who needs to put it through the PAYE system (or whether the employee needs to pay any tax due themselves). 

Understanding the requirements is essential, since getting it wrong can be costly for the Owner if they don’t should HMRC come a calling.

So along with a handy flow diagram at the end, we examine below the 3 main routes a tip can take before reaching the Stylist – and as such what tax becomes due (and who needs to pay it to HMRC):

Route 1: Tip given directly to the Stylist 

The most straightforward case is where a Client tips the Stylist directly. In this case the Owner is not involved in the process and it is the Stylist who is responsible for telling HMRC about the amount of tips received and paying the associated tax. If this is how the salon or barbershop is set up, the Owner should make it clear to the Stylist that such tips are outside PAYE, that it is their responsibility to pay any taxes due and advise them to contact HMRC (as they may collect that tax by adjusting the employee’s tax code). 

There is no NIC payable on the tip in this route since the tip is not ‘touched’ by the Owner at any point. 

In summary – the Stylist is responsible for paying any tax (and there is no NIC).

Route 2: Tip given to the employer and subsequently distributed to the stylist 

Where a Client adds a tip to their bill and then pays (say) by card, the tip has effectively been given to the Owner in the first instance (who may then pass it on to the Stylist or pool all such payments to share out between staff members). Another example of this route is where the Owner requires that all cash tips are centrally pooled for distribution on a basis decided by him/her. 

As HMRC see it in this route, the tip is distributed to the Stylist by the Owner and so forms part of their ‘earnings’ and as such the Owner is responsible for putting them through the existing PAYE system (along with the Stylist’s salary & commission).  

In this route, NICs will also be due, so both the Stylist and the Owner are worse off. 

In summary – the Owner is responsible for paying the tax and NIC.

Route 3: Tips under a tronc system 

Not as common as Routes 1 and 2, a system under which tips are pooled and distributed to staff by someone who is not the Owner is known as a ‘tronc’ system. The person responsible for administering the system is known as a ‘troncmaster’ (usually one of the employees – often the senior Stylist or Salon Manager). 

As in Route 2, tips distributed to each Stylist by the troncmaster are treated as earnings but instead of the Owner, it is the troncmaster who is responsible for operating a PAYE system on the tips – totally independently of any PAYE system operated by the Owner. 

For NICs, it depends whether the tronc has its own rules for allocating the pooled tips (usually by agreement of the Stylists) or whether the Owner decides. 

Where it has its own rules, no NICs are due because although the tip may have been previously paid to the Owner, he/she cannot be said to be involved with who gets what. 

Where the Owner has a say in how the tips from the tronc are allocated then NICs will be due. 

In summary – tax is paid by the tronc, with NICs only due if the Owner has any say in how the pooled tips are distributed.

Tips and the National Minimum Wage 

Importantly, tips do not count towards the employee’s total wages and so cannot be used to ‘bolster’ them when ensuring minimum or living wage rules are met. 

Tips, income and VAT 

Tips are not recorded as income but as amounts owed on the balance sheet since they are not the income of the business (but rather it has collected them on behalf of its employees). 

Since tips are voluntary they remain outside the scope of VAT. 

Further reading
Feel free to contact us should you want to discuss anything!

HMRC also have Booklet E24 which is also useful and can be found here:
https://www.gov.uk/government/publications/e24-tips-gratuities-service-charges-and-troncs 

 

The various routes are described below and summarised in the attached flowchart. 

 

 

What travel expenses can a Salon Owner claim, & why bother?

We are asked this a lot by Salon and Barbershop owners, so here’s a quick guide we’ve put together:

The golden rule

The golden rule (which has been set by HMRC) is that you can only claim for business travel.

What is business travel?

Any travel that you incur in relation to running your Salon or Barbershop.

As a test, think about whether you would have made that journey had you not had the Salon.

Examples of business travel are:

  • Travelling to a supplier to pick up hair product
  • Travelling to a venue to undertake the latest training in hair colour
  • Travelling to a hotel to receive an award for your Salon
  • Travel to your Bank to pay monies in, or meet with the Bank Manager
  • Travel to a Client’s home to provide services

What is not business travel?

Home to work travel is not allowable by HMRC in any industry.

For Salon and Barbershop owners, they consider such travel to your “work place” to be ‘regular and predictable’ and so falls into the non-allowable expense of commuting.

If however, you have more than one salon, travel between them is allowable.

What does claiming actually mean and how do you do it?

It means either:

    • paying for your travel using the business’s money (either cash from the till or using the company debit card)
    • paying for the cost yourself and then putting in a “claim” to your business to reimburse you
    • if using your own vehicle, then putting in what’s called a mileage claim

For the first 2, simply provide your accountant with the details and the ticket or receipt. For the last one, provide your accountant with details of the journey and the mileage involved (both ways!).

They can then put the cost through the books.

Why bother?

Business travel is allowable for tax, so this has 2 implications:

  • Your business can offset the costs against profits – and so reduce the business tax it has to pay
  • As owner, you can extract money out of the business without incurring personal tax or NIC

So very worth doing!

Additional costs

As well as the cost of the travel itself, other costs can be claimed – such as parking and congestion charges.

For longer business trips (for example, attending an awards ceremony in a different city, or attending a 2 day residential training course, or just heading to the other side of London for the day for work), additional costs can be claimed. Largely these are lunch, dinner and hotel costs but there are additional requirements around these claims.

Anything else?

Feel free to contact us if you need advice on anything to do with travel by clicking here: Contact

Payment on Account | next one due 31st July. Or is it?

Background

The 2nd payment on account relating to income tax for the tax year 2018/19 is due by 31st July 2019.

For Salonfrog Clients who have our Personal Tax Return bolt-on service, they already know the amount they need to make.

For everyone else, you should check your HMRC tax account (or refer to the Statement of Account HMRC may have sent them).

However, there have been problems with HMRC’s self-assessment system, which means many tax payers have not been requested any payment on account.

Houston, HMRC has an issue…

In January 2019 HMRC’s self-assessment system failed to generate payment on accounts for 2018/19 for some taxpayers. At the start of the year, HMRC worked with Agents (like Salonfrog) to rectify this – but only where either the tax payer or the Agent insisted on payments on account being set up.

However for many, this was not done and the 1st payment (due back in January 2019) was missing, with the 2nd payment (due by 31 July 2019) also not fixed.

So what does this all mean practically?

If you expected to make a payment on account but your Account shows none is due, you do not need to make a payment by 31 July this year. However, this does mean that all of your 2018/19 tax bill will now be due in January 2020 and you should ensure that you budget for this.

HMRC has said it will not create a payment record unless a payment has been made and interest charges could apply; however any payment you do make will be credited against the total liability due by 31 January 2020.

Business Rates for your Salon or Barbershop

Your business rates are based on a valuation of your salon or barbershop and changes are being made.
New legislation is being introduced, depending on where you are in the UK:

England & Wales

Property revaluations are now to be done every 3 years, rather than every 5 years. The next property revaluation will now take place in 2021 rather than 2022.

Scotland

Similar legislation is expected to be replicated in Scotland, likely to take place in 2022.

Good or bad news?

That depends.

Hilary Hall, NHF/NBF chief executive, said:

“Especially for salons in areas where commercial rents are falling, this is good news. Earlier and more frequent revaluations give salons a better chance of business rates more accurately reflecting their current value on the rental market. Of course, the opposite is true for salons in areas where rents are going up.”

According to a recent survey by the NHF/NBF, around two thirds of hair salons, beauty salons and barbershops don’t pay business rates at all because they qualify for small business rates relief (see the section at the bottom).

Larger salons are more likely to pay business rates, which are becoming an increasing financial burden. Almost half (42%) reported that their business rates had gone up when they were last revalued in April 2017, although 13% had seen their rates go down.

Discounts of up to one third are available for businesses with a rateable value of £51,000 or less in 2019-2020 and 2020-21. In the NHF/NBF survey, 41% of salons said they were unaware of this additional relief and many were unsure whether they had to apply for it or whether it would be automatically applied by their local authority.

Business Rates Relief

In England, if your Salon or Barbershop’s rateable value is less than £15,000, you receive a discount to your rates bill.
And if it’s less than £12,000 you can apply to pay no rates.

The rules in Scotland depend on your local council but there are also reliefs available.

More information can be found here:

England: https://www.gov.uk/apply-for-business-rate-relief
Scotland: https://www.mygov.scot/business-rates-relief/

Electric Cars – the most tax efficient car BIK

Electric Cars
If you’re thinking about going for an electric car soon, it is very well worth waiting until after 5th April 2020 and getting your Ltd Company to buy/lease it. Electric cars (with less than 50g/km Co2) will see the benefit in kind (BIK) charge reduce from 16% to 2% for 20-21.

Contact us if you’re thinking about this and we can give you more details.

Mobile phones – a tax free perk

Mobile phones

If your contract is coming up for renewal soon or you’re thinking of upgrading your handset, there is a tax advantage of getting your Ltd Company to do this for you. Mobile phones are a tax-free benefit and the Ltd Co is allowed the costs as a tax deduction.

The contract must be in the name of the Ltd Co though.

Contact us if you’re thinking about this and we can give you more details.

Giving to charity | through your Ltd Co

Most of our Clients make payments to charities directly from their Limited Companies – which is great!

Ltd Companies can get tax relief on these gifts but the relief works differently than for individuals, self-employed sole traders and partnerships.

Your company can claim tax relief as long as the donation meets a number of qualifying conditions, which you can read about here:

https://www.gov.uk/tax-limited-company-gives-to-charity

If you follow the rules, we can then make sure you get the tax relief for these payments.

Tax-Free Childcare

Do your employees know how to apply for Tax-Free Childcare?

Tax-Free Childcare can be used to pay towards the cost of (qualifying):

  • after school clubs.
  • play schemes.
  • holiday clubs.
  • summer camps.

There’s a simple step by step guide parents can use if they want to apply for Tax-Free Childcare, at

https://www.gov.uk/get-tax-free-childcare

It tells them:
• how to find out the childcare support option that’s best for them
• how to check if they’re eligible for Tax-Free Childcare
• how to apply for Tax-Free Childcare

If their application is successful they will get an online childcare account, where they can:
• select a childcare provider
• pay money into their account and receive the government ‘top-up’
• pay their childcare provider

They will need to reconfirm (every 3 months) to check they’re still eligible for Tax-Free Childcare.

You don’t need to do anything, but telling your employees about the step by step guide and where to find it may help them with their childcare costs.

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