Reducing hairdresser's turnover

Reducing hairdresser's turnover

Didn't find your answer?

A client who operates a hairdressing salon has an issue with turnover approaching the VAT threshold.  The salon operator rents the premises from a couple who have a small property portfolio.  The director of the salon is the wife's sister.  The landlords are also clients.

As business increased in the salon the director asked me if there any way that they could put off registering for VAT as long as possible.  I advised them to consider renting chairs rather than employing more staff.  The National Hairdressers' Federation has a standard "Independent Contractor Chair Renting Licence Agreement" that seemed to fit the bill and they used that agreement to rent out three chairs.  This reduced the salon's turnover but maintained its profit.

The salon turned over £80,000 in the year to 30th September, including the the chair rental income.  In discussing the results with the salon director we are considering how they may avoid going "just over" the VAT threshold.  She proposed that the independent contractors rented chairs directly from the the landlords.  Because of the relationship with the landlords they have agreed to reduce the rent to the salon by an amount similar to the rent from the independent contractors.  My first reaction was that the landlords did not own the chairs and could not rent them out.  After thinking about it for a short time I wondered whether my hang up was on the use of the words "chair rental" rather than the principle of renting space within the salon.  I have advised them to go to a local solicitor to get a quote to draw licence agreements to allows the independent contractors to rent space within the salon directly from the landlords and to amend the salon's licence to reduce the space and rent that it occupies.  It also occurs to me that the landlords may need to buy the chairs and some associated fixtures and fittings from the salon in order that the licence agreement with the independent contractors allow them to use landlords' fixtures and fittings.

Have any colleagues come across this before? Does anyone have advice to offer?

I realise that if this solution was adopted it may only be a temporary fix unless the VAT threshold increases,  I also am aware if the issues of the independent contractors.  So, kind comments on these points are not sought.

Replies (5)

Please login or register to join the discussion.

chips_at_mattersey
By Les Howard
18th Nov 2015 09:52

Chair Rental

Since October 2012 chair rental has been standard rated.

Thanks (1)
avatar
By Roland195
18th Nov 2015 09:59

Risky

Seems particularly high risk to me for little benefit to the salon owner - would the salon owner still be responsible for making up rent for unlet chairs?

The salon owner may be better off by simply restricting their own hours to stay below the threshold.

Thanks (1)
paddle steamer
By DJKL
18th Nov 2015 11:32

i have never liked

I have never liked planning that relies on "goodwill" amongst parties (family relationships etc)

Everyone knows these can change- divorce/death/ change of financial circumstance- years ago attended the odd directors meeting where two sisters who were directors each brought along their respective solicitors (they did not talk to each other)- relying on family connection does not always work. In addition what if the property owners sell/ need to sell their property to A N Other who is not family, the licences/leases/arrangements tend to carry with the property, they are not particular to the individuals.

Drafting up what is proposed into a strong legal construct that protects your clients but with a landlord who possibly controls the future  looks pretty difficult (maybe impossible) The new "leasing" arrangements would appear , as just one negative point, to possibly  limit the ability/ options of your clients to in future sell/ transfer their business and the price they might get. There will be a lot more potential downsides lurking within the arrangement- start examining closely and they will all come out of the shadows.

I would not be helping any client with such an arrangement unless I had managed to obtain full indemnity re my actions if it later goes pear shape, or had worked through a very full risk assessment of what, in a business sense, could go wrong, communicated that to the client and charged an appropriate fee- and irrespective of how many negatives I anticipated, and communicated to my client, I know there will be some I have not spotted-it just looks like that sort of transaction.

Our job is surely about more than just tax/vat planning, it has to also cover risk assessment and stopping clients doing maybe stupid things for tax planning purposes without fully evaluating the risks inherent ; both tax risks and other business risks.

Thanks (1)
avatar
By DMGbus
18th Nov 2015 13:41

Legitimate scheme

The chair rental scheme is a widely used and legitimate scheme and is tax effective based on current VAT legislation, subject to it being properly executed and complying with detailed rules (Hint: try NOT to be too clever by seeking to have the chair rents allegedly VAT exempt by an artificial / uncommercial / impractical arrangement).

Just do the maths:

(a) Don't use the scheme that competitors might well be using

(b) Use the scheme like competitors might be using

Compare the VAT liability at (a) with that of (b) and consider if the implementation has any disadvantages - it is a run-of-the-mill cost-benefit analysis.

As a professional tax advisor I would feel uncomfortable to NOT recommend what is effectively an officially recognised scheme, yes it is tax avoidance(*) but then so is the payment of dividends vs. salary.  

(*) Tax mitigation is currently still lawful (some term it tax avoidance and infer that it is immoral).  It is NOT tax evasion which certainly is to be avoided.   

 

Thanks (1)
avatar
By rorydowney
18th Nov 2015 13:56

Afternoon Off

Ask them if they would rather work 10% less for the same money, or 20% harder for the same money?

Thanks (1)