Monthly Archives: November 2016

The First 3 Questions Your Accountant Should Ask You

During a recent course I attended, the room was asked to write down the first three questions they would ask potential clients/customers to gain the greatest insight in to them.

Everyone went about quietly thinking and scribbling down ideas. I didn’t. I knew mine as I ask them to every potential client I meet straight away.

They’re not fancy questions, nor would most people (or accountants) consider them insightful. But as a means of understanding the ecosystem the client works and lives within, they give me so much information.

The three questions are:

  1. How old are you?
  2. Are you married?
  3. Do you have any children?

Most people ask these questions in casual conversation. When I ask them however, it’s a loaded question because the answers will hugely influence how I work with the client and what advice I give them. Here’s why.

How Old Are You?

Generally, I have a ballpark figure in my head for each potential clients age. However, I’m sure we’ve all offended or complimented people in equal measure by guessing this number. So, I tend to just ask.

If clients are in their 20’s or 30’s the following need consideration:

  • Is their business at a stage of profitability that they can start to provide for retirement?
  • Do they still have any student loans outstanding?
  • What are their plans for either retirement (yes, this needs considered in your 20’s and 30’s) or exiting their business? If they plan an exit, how? And what will they do after that?
  • Have they multiple income streams that can take dependancy off their business in case of a doomsday scenario?
  • Do they own their own home yet? Are they planning to build/buy? Consider Help To Buy ISA’s and LISA’s (must sign up to LISA’s before the age of 40)

If clients are 50 or over:

  • When do they plan to retire?
  • Have they been making pension contributions? Have these been sufficient to retire when they plan to?
  • Have they any breaks in National Insurance contributions that might affect how much State Pension they receive?
  • Have they any other income generating investments?
  • If they are already 65, they are entitled to an increase Personal Allowance
  • Have they prepared a will? What does it say?
  • Have they started to dispose of their estate during their lifetime? Can they start to do this, so as to bring much of their estate outside Inheritance Tax (IHT)?
  • How healthy are they? Might they (or their spouse) need to move in to a care home at some stage in the future? Ownership of assets can greatly affect how much they need to contribute to this cost.

Clients between 40 and 50 have a lot of the same consideration – pensions, retirement planning, diversifying income & investments, and estate planning (or at least giving consideration to estate planning).

Are You Married?

Again, a quick glance at the left hand might give this one away but best to ask nonetheless. If they are indeed married, the following tend to go through my head:

  • Does their spouse work? If not, can they work within business to extract a wage and use personal allowance?
  • Are there any unused personal allowances that can be part transferred?
  • If the business is a limited company, can the spouse have shares transferred to aid tax efficient cash extraction?
  • Are combined IHT Nil-Rate Bands sufficient to shelter the home house plus any other assets?
  • What’s in their will? Do all assets/business interests transfer to the spouse? Is this a good thing?
  • Do they own a home? How much is left on their mortgage? Is it practical to pay off early? Is there equity available in the property if they needed to refinance?

 

Do You Have Children?

Having kids is possibly the most important of these questions as it has huge consequences for tax and business planning:

  • What age are the children? If they are school leavers, the parents are likely going to need access to cash if they are going to college
  • Are any of the children involved in the business? Are they part of the succession plan of the business? If not, what is the succession plan?
  • Is it feasible to make children employees or shareholders in the business to aid tax efficient cash extraction?
  • Are the parents entitled to/claiming tax credits?
  • Are the parents paying registered childminders? If so, the new Tax Free Childcare scheme will be of interest to them
  • Are the children provided for tax efficiently in the will? Have the parents explored trusts as an options of providing for their children?
  • Have Junior ISA’s been set up for the children?
  • Have Child Trust Funds been set up for the children?
  • Are the parents planning any more children? Are they entitled to Statutory Maternity/Paternity Pay or Maternity Allowance? Is the business paying any SMP?

Getting Personal

When I explained to the course trainer that these were my three questions, she was somewhat surprised. I think she was worried I might offend some people by asking these personal questions right off the bat. I’ve yet to come across this.

Some might say I’d be better off asking about the business, but for the most part if a client is a hairdresser, lawyer, coffee shop, restaurant, IT consultant etc, the business model will (generally) be quite similar to every other business of that trade.

Whilst I gain a huge amount of insight in to the client by asking these questions and put myself in a better position to offer the best advise possible, there’s something more important that I gain out of this line of questioning.

I get to know my client.

Not what their business is, not how much money they make, not how healthy or otherwise their finances are. I get to know the person and what’s important to them. I connect with them on a human level. Aside from the professional insight, I am genuinely interested in them and their lives. Oftentimes when advising on someones business, you’re advising on the means by which they provide for themselves and their family. It’s a deeply important and personal thing. So whilst taxes and finances are important to both me and the client, their lives, family and happiness are far more important.

To both of us.

Business Tips: Hairdressers & Hair Salons

business tips hairdressers hair salons

Self-employed hairdressers and salon owners have a lot more to do than just cut hair. Running a hairdressing business, like any business, involves a lot more than just being able to do the job. Running a business is another job on top of that. This article won’t give any tips on extensions, blow dries or up-styles (that’s way outside the scope of my expertise). However, if you are a salon owner, mobile hairdresser or you rent a chair in a salon, here are some tips to help you run your business.

Employed or Self-Employed – the Age-Old Debate

To many, the question of whether they are employed or self-employed hairdressers seems an easy one. However, your interpretation of your status may differ to HMRC’s. By renting a chair in a salon, and deriving your income from  your takings for the week (less costs) you would expect to be classed as self-employed. However, HMRC’s test go further than this. They look at the underlying facts.

For example, if you were self employed you would be expected to be able to come and go as you please. If you only wanted to work 3 hours a day, so be it. However, if the salon in which you rent the chair expects you to be there 9-5, Monday to Friday, this is more akin to an employer/employee relationship. Additionally, if you were self-employed, you would be expected to have a “right of substitution”. That is, you can send someone in your place to carry out the job on your behalf. Even if you do explicitly have this right within the salon you operate, this mightn’t even be enough for HMRC. They prefer to see you actually using this right.

By not nailing down the detail of the engagement, there are potential consequences for both the hairdresser and the salon. The hairdresser, if deemed to be an employee, would not be allowed to make deductions for their expenses such as travel costs, equipment and chair rental fees. The salon would be liable to make tax and National Insurance deductions as well as pay Employers National Insurance. In short, it costs everybody money if it’s challenged.

To try and minimise the scope that HMRC has to challenge this relationship, have a chair rental agreement in place which outlines the mechanics of the chair rental. This will cover off issues such as working hours, rights of substitution and rental costs and should be robust enough to withstand HMRC queries, should they arise. Both parties should also take steps to ensure there is a clear divide between the two businesses such as operating separate tills, separate insurances and separate appointment diaries.

VAT On Chair Rentals

In his 2012 Budget speech, then Chancellor George Osbourne, went out of his way to make it clear that hairdressers chair rental fees are not VAT exempt. This has long been understood by most but misinterpreted by a few. By renting a chair to a stylist, a salon is not, by HMRC’s definition, supplying “a licence to occupy land” (which is VAT exempt), but rather supplying “all the facilities requisite for the carrying on by him or her of the business of a hairdresser” (which is subject to the Standard Rate of VAT). This has been the case since November 2007 after a High Court Ruling in HMRC’s favour. In some instances, hairdressers were able to use chair rental as a way to avoid registering for VAT in the first place.

In short, if you are a VAT registered salon and you are renting a chair out, you must charge VAT. If you are not VAT registered, you don’t need to charge VAT. However, check that your sales from hairdressing and products combined with chair rental fees don’t push you over the VAT registration threshold (currently £83,000).

Understand you costs

Costs can vary for each salon, hairdresser or freelancer. However they are for the most part within some narrow ranges. You product costs for example should be 7-14% of sales (depending on whether you only buy products to use on clients or resell products to client). Wages will typically be 45-55% of sales. Again this can move depending on numbers of qualified/trainee stylists. Rent will typically be 5-10% of turnover, rates  2-7% and light & heat also 2-7%.

For stylists renting chairs, your main cost is obviously going to be renting the chair. This cost is dependent on the salon owner. Some go with flat rates, some with a percentage of your takings and others use a hybrid of the two. Make sure you are clear on what the rental fee does and doesn’t cover. For example, one chair rental may seem cheap but doesn’t include products, towels or laundry costs.

Over and above chair rental fees, expect to cover travel costs, some advertising, phone bills, insurance, accountancy fees, bank charges and any professional subscriptions/affiliations.

Insurance

Insurance is one of those things you don’t need until you need it. For hairdressers, public and product liability insurance should be a must as well as professional indemnity insurance. Freelance/mobile hairdressers may need additional cover to if they are travelling to clients homes/premises. If you employ staff then also get employers liability insurance. Usually a broker can bundle these together for you for maximum cost efficiency.

VAT – Flat Rate Scheme for Hairdressers

For some salons, it may be worth considering moving to the Flat Rate Scheme for VAT. This scheme applies a flat rate percentage to your gross sales to decide how much VAT you pay over. You don’t need to calculate how much VAT to reclaim as this is deemed to be included in the percentage. For hairdressers, the rate is 13% (for the first year on the scheme this gets discounted to 12%). You are still able to claim back VAT on fixtures, fittings and equipment so long as each purchase is for more than £2,000 inc. VAT.

One of the big benefits of the Flat Rate Scheme is the time it takes to do your VAT return. So long as you have good sales records (cash book or till reports) you simply need to add these up and multiply by the flat rate percentage. In some instances this may even be cheaper than operating the normal VAT scheme. This is often the case if product sales are a very small part of your revenue.

To be eligible to join the flat rate scheme, you gross sales cannot be greater than £180,000. Once you join, you can stay on the scheme so long as your gross sales don’t exceed £230,000.

Managing Time and Money

In terms of the day to day running of a hair salon, there are a number of pieces of software out there to help manage your appointments and till. Two application I’m a big fan of are Timely and Vend.

Timely is a cloud based appointment scheduler. Aside from just letting you keep track of your appointments, it also allows online appointment booking, text message reminders and Facebook integration. It also stores all your customer information and purchase history as well as letting you set up loyalty schemes and discounts. It also has full integration with Vend…

Vend is a cloud based POS system. You set up your products and services along with prices and it records the transactions as well as emails receipts to customers. It integrates with most till hardware so you can still use your credit card machine and receipt printer. It also has a stock management component so you can keep track of inventory and reorder before you run out.

These two apps work together seamlessly and are very easy to set up and use. The big advantage, if you are a salon owner, is that you can easily see how full the diary and the till are from anywhere. Knowing this information let you schedule staff, stock replenishment and special offers much more effectively.

Both of the above also integrate with Xero’s cloud accounting platform. So your sales and stock values are automatically imported in to the software leaving you (and your accountant) with one less thing to do.

What’s in a name?

If you are just starting up your business and have decided on a name for your salon, I highly recommend you check that the name you want to use does not already have a registered trademark against it. To do this, first visit the Intellectual Property Office Trade Mark Search website. Type your proposed name in the box at the top and, under “refine search” tick the box number 44. This will search for any similar names in the same industry. If someone has already registered the name, I’m afraid it’s back to the drawing board.

This simple search could save you a lot of time and expense. Worst case is someone sues you for breaching their trade mark. Best case is you have to rename your business which also comes with a cost – changing signs, logos, marketing materials etc.

Once you have a name that no one else has registered, you should register the trade mark yourself. The cost starts at £170 then £200 per year to renew. This will stop anyone else using your name or logo and helps to protect and strengthen your brand.

 

As always, if you have any questions or queries, let me know. Or if want some additional advice or guidance on chair-rental agreements, Flat Rate Scheme or anything else, please get in touch or email me. Happy to answer all queries.