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.
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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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| 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.
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| Are you paying them minimum wage? Big fines if not. |
vii. Staff wages are only paid from your business bank account.
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| 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.
————— |
||
| 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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As we reported last year (here), if you took advantage of HMRC’s scheme to defer your VAT payments between 20 March and 30 June 2020 (as most did), you are required to pay the VAT debt in full by 31 March 2021.
Pay over 11 months
However, you can now pay the amount owed over 11 months by applying via an online portal which will be open from 23 February 2021, but tax agents (like Salonfrog) cannot do this on behalf (although you will be charged interest at 2.6% from 1 April 2021).
HMRC is asking businesses to pay their VAT debts in full by 31 March 2021 if they can. Where the cash is not available the business must apply online to spread the payment of the debt over up to 11 instalments ending in January 2022.
If you don’t pay the full amount by 31 March 21 or join this scheme to pay over 11 months, HMRC will impose penalties for late payment, and possibly initiate debt collection action against you.
Online portal
The company director or business owner must access this portal themselves, tax agents nor their accountants can’t use it to arrange a VAT payment plan on behalf of clients.
This is because as part of the payment plan the business must set up a direct debit to make regular payments from their business bank account. Tax agents don’t have the authority to make payments out of clients’ bank accounts, so can’t enter the agreement on behalf of clients.
Conditions
Before a business can use this new VAT deferral scheme it needs to get all its VAT ducks in a row as follows:
The good news is HMRC will allow businesses to arrange a payment plan for the deferred VAT even if they have already entered a time to pay arrangement for other taxes.
The business owner/ director must have the authority to set up a direct debit to pay the remainder of the debt by monthly payments. Where a direct debit can’t be set up, perhaps because there is no UK bank account, or the account has two signatories, the business owner must call HMRC on 0800 024 1222.
If the business doesn’t have the cash to even pay the first instalment of VAT, the owner should contact the HMRC payment support service on 0300 200 3835.
Join sooner rather than later
HMRC wants all of the deferred VAT paid by 31 January 2022, so the later the business signs up to this scheme to spread the payments, the fewer instalments will be available to it.
For example, if the business joins the scheme by 19 March it can spread the payments over 11 instalments starting in March 2021, but if it joins the scheme in June 2021 it can only spread the debt over eight instalments.
If the business owner can’t use the online portal, they should call HMRC on 0800 024 1222 to arrange a payment plan, and this telephone service will be open until 30 June 2021.
Here’s a common set up:
A chair renter finishes the cut of one of their clients; then takes her up to the reception desk, where she lets the Salon’s Front of House take the clients payment through the Salon’s own POS and merchant card reader.
How will HMRC view this? Will this sale belong to the self employed renter, or the salon for VAT and tax purposes?
Here’s the answer
There’s a bit of a misconception in our industry that a salon cannot take the payment in this way.
However, this misconception is wrong.
HMRC would look at the whole arrangement between the Salon and its self employed renters (both from the point of view of the contract between them and what is happening in reality). HMRC would do this by going through an agreement that the NHBF and HMRC have in place; as well as using the HMRC CEST tool to determine 2 things:
In our specific example, the NHBF/HMRC agreement includes the following:
Section 4, Money
If your salon does have this arrangement in place, it should ensure it is set up 100% correctly to keep HMRC happy. Who takes the money is just one small part of it!
We get asked this a lot by Clients and non-Clients and the answer is within the depths of the new MTD for VAT legislation.
In short the answer is yes – you can – but there are some limitations (see below) – and we think you should only do this in limited circumstances. Using a VAT invoice is always the better option if you can since (for example) it helps with later analysis of costs and stops duplication of bills.
Here’s the exact wording from HMRC’s VAT Notice 700/22: Making Tax Digital for VAT
“Some businesses record the value of each supply from a supplier statement instead of individual invoices. This may occur particularly where a business receives a large number of invoices from the same source. In HMRC’s view, it is best practice to record digitally the individual supplies as this means less risk of invoices either being missed completely or being entered twice – once as an invoice, and once as part of the statement. There is also less risk of the wrong rate of VAT being applied.
On the other hand, HMRC accepts there may be additional work for a business in capturing individual supplies digitally and this in itself could lead to data entry errors. Therefore, HMRC can accept the recording of totals from a supplier statement where all the supplies on the statement relate to the same VAT period and the total VAT charged at each rate is shown. If you choose to do this, you must also cross reference all supplies on the supplier statement to invoices received, but this can be done outside of your digital records.”
The following rule has the force of law:
Where a supplier issues a statement for a period you may record the totals from the supplier statement (rather than the individual invoices) provided all supplies on the statement are to be included on the same return and the total VAT charged at each rate is shown.
If you discover that one of your VAT returns needs to be corrected, we look at how to do this; and if you can expect any fines.
Time limits
The time limit to correct a VAT return is 4 years from the end of the VAT accounting period which it covers.
Having said that, you should sort it out as early as possible to minimise the risks of penalties and interest.
Deliberate errors
If the error was deliberate, you must notify HMRC in writing or using Form VAT652.
Errors under £10,000
If the net error is less than £10,000, you can simply adjust it through your next VAT return.
However, this does not constitute a “notification of the error” to HMRC and so does not necessarily avoid penalties. If the error was as a result of careless behaviour, HMRC are still entitled to charge penalties in the event that they discover it at a later date, even if it has already been adjusted on your next VAT return.
HMRC advise that including the adjustment on the return does not constitute a disclosure. This means that without also completing a VAT652 Form or notifying HMRC in writing, unprompted penalties could still be charged.
HMRC (as you would expect) advise that all amendments should be notified to them to gain the maximum reduction of any penalty for careless errors.
Errors over £10,000
Contact us for advice!
Adjustments which are not errors
Some adjustments are not errors, and these include:
It is only if the original adjustment under these schemes was incorrect that you would complete an error notification.
Where to send the correction notifications
The notifications should be made in writing, or using the VAT652 Form. They should be sent to:
HM Revenue & Customs
VAT Error Correction Team – SO864
Newcastle
NE98 1ZZ
Salonfrog’s VAT service
Mistakes happen. That’s life. And for Clients who have our VAT service, we take care of all this for you so you can get on with what you do best!
This has been the biggest change we’ve ever seen to HMRC reporting and has caused numerous headaches to accountants throughout the UK. And with more changes still to come, we continue to follow the progress of HMRC’s numerous updates on the subject.
Still, we’re celebrating this achievement!
If you want to know more about MTD, have a look here: