[Updated] How does VAT work for beauty salons?
Any UK business with a turnover of more than £85,000 must be registered for Value Added Tax (VAT) with HM Revenue and Customs (HMRC) but the 20% increase in costs can be difficualt to pass on to clients.
VAT - what's new for 2023?
"For VAT accounting periods starting on or after January 1, 2023, the way HMRC applies penalties for late VAT returns has changed," explains Melanie Beech, director of The Salon Expert Accountants.
"Under the new system, you face penalty points if you submit your VAT return late, this includes nil VAT and repayment returns as well.
"Late VAT submission penalties work on a points-based system, so for each return you submit late you will receive a penalty point.
"When you hit the points threshold in any 12 months period you’ll automatically receive a £200 penalty, and a further £200 late VAT payment penalty for each subsequent late submission while you remain at the threshold.
The threshold is set by your accounting period:
- Annual accounting period threshold = 2 penalty points
- Quarterly accounting period threshold = 4 penalty points
- Monthly accounting period threshold = 5 penalty points
"You will also have late payment penalties applied to any payments of VAT not paid in full by the relevant due date.
Late payment penalties are made up of penalty interest from the first day that your payment is late and a late penalty payment if your payment is 16-31 days overdue.
If your payment is 31 days or more overdue, you will receive a larger first late payment penalty, plus a second late payment penalty on top of that so it is imperative to make any payments as quickly as possible."
When should I register for VAT?
"It’s important to keep an eye on your turnover so you can register for VAT in plenty of time if you get close to the threshold. You can incur penalties if you fail to register when you should, so keeping accurate records is a priority. Once registered, you must report to HMRC the amount of VAT you’ve been charged and the amount you’ve paid," explains Paul Pritchard, director of Abacus Accountancy, which specialises in helping salons to become more tax efficient.
"This is done through your VAT return which is usually due every three months."
Beech adds, "You also need to be aware that the £85,000 threshold is not for a calendar year, tax year or financial year. It is in any rolling 12-month period,. "It’s really important, therefore, that you keep track of your turnover for the past 12 months on a regular basis. As soon as that cumulative 12 month turnover exceeds £85,000 you must register for VAT.
"If you are aware that your monthly takings are somewhere near £7,000 per month I recommend you check the previous 12 months turnover every month to make sure you don’t miss the deadline to register with HMRC. You really don’t want the stress and worry – not to mention the finds of being late registering.
"There are some circumstances, however in which an accountant will recommend that a business registers for VAT before they hit the threshold of £85000. For example if you open a new salon with employees and are expecting to hit the VAT threshold within the first year it can be worth registering for VAT as soon as you open."
How to claim expenses
A recent survey found that beauty therapists could be losing over £1k in unclaimed expenses.
"To operate within the system, you charge VAT on all goods or services and can then reclaim any VAT you’ve paid on business-related goods or services. For most businesses, this works well and has its benefits, but beauty is a very different business model."
"Salons don’t tend to buy a lot of goods; their main costs being wages and labour, unlike retail businesses, which buy and sell stock or materials and offset the VAT they pay by being able to reclaim VAT on goods they have bought. This means the VAT salons pay pretty much comes straight off their profit margins," explains Pritchard.
Whether you’re a limited company or a self-employed therapist, you need to ensure that any money you spend on your business – from tools and products, to training and maintaining your skills – can be written off against tax. There are many different types of expenses you’re likely to incur, so it’s always worth checking with your accountant what you can write off against your income when it comes to completing your tax return.
Claiming for everything you’re entitled to could save you thousands of pounds every year, so it’s imperative to keep accurate records of any business outgoings so that nothing gets missed out.
The good news is that this no longer has to be as tedious as it was in the past, as there are now easy ways to capture your expenses in real-time using just your smartphone, which can take the headache out of accounts.
Read more detail on the business expenses you can claim as a sole trader or limited company here.
Should you raise your treatment prices?
"Because wages, labour, energy bills, rent and equipment are all relatively fixed costs, when a tax like VAT goes up it is much more difficult for salons to make savings elsewhere or to pass this increase on to the customer. You don’t want to suddenly raise your prices by 20% without giving your clients a valid reason," says Pritchard.
"So, you could raise prices incrementally before exceeding the threshold so that it’s not such a shock when you do have to register for VAT. There are also schemes available such as the Flat Rate scheme, which may allow you to pay a flat rate of tax (currently 13% for salons) on your gross turnover rather than a fluctuating rate based on VAT.
"Ensure you’re operating with the most tax-efficient business structure for your circumstances and stay up to date with changes in legislation, as the most effective solution a few years ago may no longer be the best."
What if a salon has self-employed therapists?
"If you have self-employed therapists working for you in your salon, there are very specific, and quite complex, rules around what you should include in your turnover figures," says Beech. "I’d advise you talk to a specialist salon accountant about it to make sure you understand those rules and get the very best advice."