A new paper, commissioned by the National Hair and Beauty Fedearion (NHBF), has been published to suggest to the Government new models for VAT in the UK that would make it easier for salons to navigate the threshold.
Value Added Tax (VAT) is the tax that all business’ must pay when their turnover is higher than £85,000. It is added to the price of most goods and services you buy and is a way for the government to collect money to pay for public services like schools, hospitals, and roads.
Along with income tax and national insurance, VAT is one of the largest contributors for these essential public services. The £85,000 mark is known as the VAT threshold and the United Kingdom has one of the highest thresholds in Europe.
The current VAT rate of 20% can lead to a cliff edge for businesses at the threshold of £85,000 – because there is no gradual increase many businesses try find the transition to VAT too challenging, therefore making growth more difficult.
Currently, 93% of all hair and beauty businesses in the UK operate below the VAT threshold of £85,000 a year, according to the report. Just 5% turn over more than £100,000 a year.
Many deliberately stay below the threshold because the sudden increase in costs is difficult to navigate and disproportionally impacts service businesses.
The independent discussion paper, Avoiding the cliff edge: considering possible options for a VAT threshold smoothing mechanism was created by Pragmatix Advisory for the NHBF.
Rebecca Munro from Pragmatix Advisory said, "Our research is based on careful analysis of official data – from the Office for National Statistics and the Department for Business and Trade – which show the number and turnover of businesses in different industries. It shows that around 47,000 firms in the United Kingdom are holding back below the £85,000 VAT turnover cliff edge – and avoiding the cost and inconvenience of this blunt fiscal instrument."
The paper includes case studies from Finland and the Netherlands which show the positive impact of lower VAT rates; for example, the Netherlands lowered VAT to 6% in the early 2000s for labour-intensive services, which led to the creation of 4,000 sector jobs.
It sets out options for the future rather than recommending just one solution for a change in the current VAT system, including:
- Non-fiscally neutral options, i.e. reduced VAT revenue for the government, the report models two options where graduated VAT could start at £85,000. With a moderately graduated option, HM Treasury would see a loss of £2.5 billion in VAT revenue, counteracted by an additional £2 billion in increased compliance.
- Five fiscally neutral options, i.e. the government would see no loss in VAT revenue, from ‘least graduated’ to ‘most graduated’ where VAT, starting from a lower rate would increase in steps towards the current standard rate of 20%.
The paper estimates that an additional £25.2 billion in turnover would be declared. This would return an additional £2.2 billion in VAT revenue to HM Treasury, with at least £33m of this coming from the hair and beauty sector.
Whilst the paper estimates an administrative cost for businesses (£1000 per business per year in time and software costs) this would be a small share (2.5%) of average sector labour costs.
The paper asserts that these options would lead to less cash-in-hand work being done to avoid VAT, meaning more turnover declared and tax paid.
Caroline Larissey, chief executive of the NHBF, said, “93% of hair & beauty sector businesses are below the VAT threshold, some of which engage in cash-in hand work, split the business or engage self-employed workers to avoid having to register and pay VAT.
“We have advocated a smoothing mechanism as part of our campaigning on VAT but this is the first time we have set out a range of options for how it could work. The presence of the cliff edge within the current VAT regime creates incentivises businesses to remain below the threshold, forgo much needed growth and produce a lower tax yield for HM Treasury.
“The report does not make specific recommendations; it is a discussion paper for debate and to engage further with our members and inform further dialogue with the government and other industry organisations.”
Jonny Haseldine, policy manager at the British Chambers of Commerce, commented, "We have long advocated a smoothing mechanism around the VAT threshold, particularly one that minimises the administrative burden on business. We are currently assessing the options and this contribution from the NHBF is welcome food for thought."