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 your 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 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.
I’ve been working in accountancy for around 10 years now. I started out in 2008, qualified as an Accounting Technician in 2010 and then as a Chartered Accountant in 2013. I set up my own Practice in 2016. For the most part through that journey, my motivation was competitiveness. I wanted to be better than […]