From when you need to start paying VAT to whether you should outsource your beauty bookkeeping, Ria-Jaine Lincoln, aka The Beauty Accountant answers all of your burning questions'
It doesn’t matter if you’re self-employed, have a small number of employees or are heading up multiple business, even if you have your own accountant, it pays to know the ins and outs of tax calculations. So, whether you’re at the point you need to register for VAT and are unsure of the next steps, or need to get to grips with the thresholds and what you need to pay when, Ria-Jaine is here to help.
Who needs to pay VAT and why?
VAT is a consumer tax - a tax on consumer expenditure. What this means is that VAT registered business owners are tax collectors for HMRC (they use the business as a vehicle to collect the tax). Business owners collect the VAT and then they are required to pay this over to HMRC, usually every quarter after deducting any input VAT (tax paid when purchasing supplies from ‘VAT registered businesses) if they are on the standard rate scheme.
What are the VAT thresholds?
Businesses must register for VAT once the business sales turnover of ‘taxable supplies’ exceeds the VAT threshold, currently £90,000 [from April 1st 2024] although you can also register voluntarily if this fits with your strategic tax plan. Taxable supplies are goods or services made in the UK that do not qualify as an exempt supply. An example of an exempt supply being insurance i.e Not Taxable.
Business owners should remember that voluntary deregistration is available if taxable income for the next 12 months is expected to drop below £88,000. This is important because a lot of businesses may temporarily breach the threshold but by the time they have registered they need to deregister again. If this is the case there are things that they can do under the guidance of a professional tax technician, advisor or accountant.
Do you need to register with anyone to start paying VAT?
Yes, business owners must notify HMRC when they exceed the VAT threshold and must also ensure that they update business documents and payment systems with the VAT status if they are making taxable supplies. You can easily register with HMRC online. Registration is an area where the support from a Tax Technician is vital and could save thousands in VAT planning.
How do you make the transition from not paying VAT to paying VAT?
Get ahead of the VAT race! It’s extremely important to plan for VAT before the threshold is breached. Business owners must know their numbers to avoid any hiccups or issues around late VAT registration. This is the responsibility of the business owner to track, even if they outsource their accounts they should know if and when they are approaching the threshold.
Cash flow planning is crucial considering the impact of hitting the VAT threshold at their current prices and business model. Likewise, the transition is harder when a business owner has not factored VAT into pricing or set up a system and got into the habit of moving the tax element of income received into a separate tax saving pot.
As a sidenote, retail is your friend if you are a VAT registered hair or beauty business, as you may be able to make a mark up in profit and reduce your VAT at the same time. If you buy retail stock from a UK vat registered company, to sell on to customers then the VAT paid can be offset, reducing the final VAT Bill (see what can be claimed below). So, if selling products or items for after care at a mark up the business will make profit on the retail and be able to claim back the VAT paid for the items purchased. This is not an option if using The Flat Rate Scheme.
Are there any management tools that can help you with these sorts of calculations?
Bookkeeping software such as Quickbooks/XERO can help to monitor and track income thresholds on a 12 month rolling basis and also help with the MTD (Making Tax Digital) reporting requirements. Monitoring the threshold is also something that can be done via sales systems and online booking diaries, or even a simple excel spreadsheet.
Is it worth outsourcing your accounts or is it simple enough to do it yourself?
Seeking advice from an expert accountant that specialises in your industry is crucial when it comes to VAT as they will be able to advise on the best schemes available, the registration process, pre-registration claims, how to manage the process of tracking and recording tips to ensure you are not overpaying VAT (outside the scope of VAT) and more.
With the blurred lines of the self-employed models that are seen in salons it’s also important to ensure that the VAT responsibility is taken on by the correct party and this is an area where it gets very complicated if not set up correctly. There is a lot of talk around ‘employees in disguise’, but VAT is also another issue that needs to considered and managed. When self-employed workers are operating within the business you must ensure the structure is correct and that the correct party is declaring the gross sales. If a self-employed therapist/hairdresser is in contract with the salon, the VAT threshold may be reached sooner for the salon owner, this is an area that must be checked with an accountant for tax as the tax law and employment law are different. Business owners may be registering too early/late due to the structure of their business models so VAT and tax planning advice should be part of any initial business plan to avoid issues later down the line.
Keeping good accounting records is important, the first VAT return may potentially be reduced by pre-registration claims, but this is only possible with good accounting records and copies of VAT invoices and receipts. By outsourcing your accounts it will give you back the time and headspace to focus on generating more sales and getting creative, whilst giving the business the best chance of processing tax and vat returns correctly.
Will you need to increase your treatment prices if you now have to pay VAT?
You will need to add 20% VAT onto sales prices and the decision to increase prices is dependent on each individual business owner as sales prices and service times vary widely in the industry - as do the strategies around price increases.
Absorbing the VAT and not increasing prices is a huge issue for any business, at the very least a stepped increase should be mapped out to soften the blow or a growth plan created to break through the VAT ceiling.
If you start to generate over £5,000 in a month and don’t have a VAT strategy, then you need to spend some time thinking about the possibilities of exceeding the threshold and how to work towards this. By doing this in good time you can implement a staggered price increase or plan to get the business to a point where the VAT can be better managed.
What can you claim VAT on?
As mentioned earlier input TAX is the tax paid when business owners purchase supplies from ‘VAT registered businesses’ and a VAT registered business can reclaim this. You must have a valid VAT invoice to reclaim the amount.
If you see VAT on overseas purchases/online software suppliers check this with an accountant. Also ensure that you enter VAT details when prompted on supplier accounts as this can help with the VAT administration and potential issues with reverse VAT charges. Exempt supplies where no VAT is charged cannot be re-claimed.
Many industry bodies are calling for an urgent VAT reform for the beauty sector – what would this mean and does it look likely to happen?
I think this is a huge area that needs a review at least. When inflation is so high it feels like businesses are being forced into pricing higher to cover higher wages and business costs and then getting caught by VAT.
The hair and beauty industry is such a diverse space of businesses. No two hair or beauty businesses, or parts of the industry are the same. I think this is a challenge that may make it difficult to find a solution that helps all, which could hinder the rollout of any changes.
Reducing the threshold and/or rate may create a level playing field as the competition is fierce with pricing in the industry, while raising the threshold will give businesses a chance to grow, although careful cashflow planning is crucial otherwise the same issues may arise when VAT catches up.
A smoothing mechanism or tiers seem like a fair choice however this could be a huge challenge to implement and huge knock-on effect on the systems to carry them out and associated admin costs/education.
One thing that is clear is something needs to be done to deal with the ‘cliff edge’. Whilst there are VAT registered business owners that are managing VAT well given the current climate, there is evidence that the current system is stunting business growth which isn’t good for the economy.
What does the new VAT threshold limits mean for businesses?
The government’s changes to the VAT threshold in the latest budget will affect VAT registered businesses whose turnover is between £85,000 and £88,000 as they may wish to now de-register for VAT. The change will also remove the obligation to register for those who are operating with a turnover between £85,000 and £90,000 and as a result it’s said to support 28,000 micro businesses.
Ria-Jaine is offering a free 15 minute discovery call to see if they can help you and your business, you can book in at https://calendly.com/riajaine/book-a-discovery-call-thebeautyaccountant
Disclaimer: We hope this guidance is helpful. As this is just a guide the reader will be responsible for the interpretation and use of the guidance. The author makes no guarantees to the results you’ll achieve by reading this article and tax advice should be sought independently in addition to this document. All businesses need to agree their own accounting policies and guidance in this article reflects outcomes achieved if working directly with the contributor. Your results may vary when undertaking the registering and bookkeeping of your own business independently.
Words by: Becci Vallis