Vat on hairdresser rent a chair.

Two hairdressers sharing a salon.

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My client is a limited company trading as Hairstylists. The main shareholder/director works full time and all of his takings are individually recorded and lodged into the company current account. A second stylist also operates from the premises on an informal rent a chair basis. All of his takings are also individually recorded and lodged into the company account. His verbal agreement is that the company retains 40% of the second stylist's gross, and 60% is transferred to him. Does the limited company need to include this 60% as vatable takings?

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VAT
By Jason Croke
29th Feb 2024 13:05

What is "an informal rent a chair"? It is either a rent a chair scheme with appropriate contracts in place that evidence and confirm the relationship or its not.

A verbal agreement is worth nothing and I would stick my neck out here and suggest based on what you've posted, your client does not have a rent a chair agreement in place if it is verbal only and "informal". HMRC would likely conclude the Ltd company is earning 100% of all takings from both the Director and the stylist for VAT turnover purposes.

If you were to persuade HMRC that HMRC are wrong and the stylist income is their own income, how would you convince HMRC of this when there is only a verbal agreement and an informal arrangement? - this is the question you need to be able to answer before you can arrive at whether the income is 60%/40% or 100%.

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Stepurhan
By stepurhan
29th Feb 2024 13:32

To add to Jason's excellent analysis, I would add that conduct is an indicator of contract terms in the absence of a written contract.

Are people coming to the salon to book, or are they approaching the stylist directly? Is the stylist "individually" recording their sales entirely separately from any record kept for the company sales? Is the stylist making use of any other facilities, such as a card machine, owned by the company?

On the facts presented so far, HMRC would have a solid argument to assert 100% of sales belong to the company. Do you have anything other than an informal agreement to suggest otherwise?

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Replying to stepurhan:
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By B.R.
29th Feb 2024 14:14

Your comments are most useful. The stylist who rents is a colourist, whereas the company stylist is a cutter. They have separate identifiable skills. The company software separates each stylist's takings and the rent a chair stylist has his own card machine. His clients book their appointment with the company receptionist, and have their hair washed by the company trainee - hence the 40% retained by the company. The reason why ALL monies are directed to the company current account, is to ensure completeness and accountability!

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Replying to B.R.:
Stepurhan
By stepurhan
29th Feb 2024 15:11

B.R. wrote:

Your comments are most useful. The stylist who rents is a colourist, whereas the company stylist is a cutter. They have separate identifiable skills. The company software separates each stylist's takings and the rent a chair stylist has his own card machine. His clients book their appointment with the company receptionist, and have their hair washed by the company trainee - hence the 40% retained by the company. The reason why ALL monies are directed to the company current account, is to ensure completeness and accountability!

Point for. Colourist has own card machine. This is, however, a very weak point (see below).

Points against. Company software records all sales. Company receptionist books all appointments. Company employee prepares clients. Colourist card machine pays into company bank account.

Points irrelevant to the question. That they are a colourist, not a cutter. That is just the salon offering a wider range of services by "employing" people with different skills.

Are you sure the colourist is self-employed at all?

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Replying to stepurhan:
By JCresswellTax
01st Mar 2024 10:13

stepurhan wrote:

Are you sure the colourist is self-employed at all?

This is on point, it sounds as if he is an employee whose wages are calculated on a commission basis.

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Replying to B.R.:
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By FactChecker
29th Feb 2024 15:48

".. the rent a chair stylist has his own card machine"

As others have said (in greater detail and with considerable expertise behind them) that is not enough in the wider context of all the other core issues mentioned.

But it's also not explicitly clear ... do you mean merely that the stylist has one of the card machines issued to the main business? Or do you mean a separate card machine issued to a different business account holder?

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Replying to FactChecker:
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By B.R.
29th Feb 2024 16:00

The rent a chair colourist has his own card machine but the monies processed through it are directed to the limited company current account. Having his own card machine confirms to the customer that they are paying him, and not the salon.

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Replying to B.R.:
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By Paul Crowley
29th Feb 2024 16:04

No it does not. The person paid is the company, not the stylist. Only the cash tip goes to the stylist.

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Replying to B.R.:
Stepurhan
By stepurhan
29th Feb 2024 16:16

B.R. wrote:
Having his own card machine confirms to the customer that they are paying him, and not the salon.

Since the card machine directs money into the salon bank account, it does not prove anything of the sort. Arguably precisely the opposite.

That's even before considering whether they secure it in a way such that the salon owner could not use it if their own card machine was not working.

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Replying to B.R.:
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By FactChecker
29th Feb 2024 17:21

Sorry but, as others have pointed out more quickly than me, you've now removed what might have been the last flimsy leg on which your client was relying.

What a customer 'thinks' when tapping the colourist's terminal isn't relevant ... from what you now say the payment is made to the main salon limited company's bank account. And FWIW the card processor will have no record of a separate business in the name or ownership of the colourist.

Back to the drawing-board ... with the additional possibility of a need for re-stated accounts (depending of course on what's previously been recorded).

Thanks (6)
VAT
By Jason Croke
29th Feb 2024 14:32

Take a small book-keeper business. They might have someone who does pure data entry and someone who does the checking and submitting of reports.

Two people, doing different things. Are they therefore two separate traders or are they a small book-keeping business with various skillsets operating as a single book-keeping business.

OP - the focus is not on whether one cuts and one blow dries or colours, what matters is the contractual relationship. If i went into your clients salon having made a prior booking, I get my hair done and make payment at the till. I would presume that I am buying the service from the salon. That is how HMRC will see it too.

If the colourist has their own card machine, then why are all payments going through the company? Sort of negates the need for the stylist having their own card machine.

I understand that for accountability, the salon owner might want all sales going through the one card machine and one bank account so that there's a clear audit trail, so why is there another card machine even in play here?

We're back to agent or principal concepts, the Ltd can be principal when the Director makes a sale and the Ltd can be agent when the stylist makes a sales, thus separating the income between Director and stylist, but that is not just done by a diary of bookings, it is done by the contractual relationship .

What you propose can be achieved but there's no way I'd recommend such a setup purely on a verbal handshake basis, get the relationship documented and then when HMRC come to query it, both Director and stylist will have their relationship clearly mapped out.

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By Paul Crowley
29th Feb 2024 15:42

The 'self-employed' person could easily be seen as an employee. Consider all the taxes?
If colourist ruins my hair, I would look to sue the salon owner.

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By frankfx
29th Feb 2024 16:16

Google
"hmrc guidelines to rent a chair"

Many useful resources will be listed.

Do the individuals belong to a trade body?
Seek support there.

Rent a chair occupants may come and go.

It is therefore in your client's, the limited company, to gain a full understanding of the regime and implement effective procedures.

Written contracts and the "actuality" are vital.

Thanks (3)
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By Bobbo
29th Feb 2024 20:12

If I booked a cut and colour who (ignoring for the moment that whichever card machine is used the money goes to the company bank account) would I be paying?

Surely the customer wouldn't be required to make a payment on each machine?

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Replying to Bobbo:
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By B.R.
01st Mar 2024 10:45

Each stylist arranges appointments, operates the specialist software and processes payment by credit card using their mobile phones. They simply share costs - which surely shouldn't contravene business regulations. The limited company is a vehicle to accommodate the practical issues of trading. They realise that they could solve the problem by having two limited companies, 2 bank account, 2 premises leases, 2 accountancy fees, 2 Paye/NIC systems, 2 electricity meters etc - the list is endless.

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Replying to B.R.:
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By Tax Dragon
01st Mar 2024 10:51

Do you mean Bobbo couldn't book a cut and colour? It would have to be two separate bookings? Is that on two separate (apparently specialist) booking systems?

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Replying to B.R.:
Stepurhan
By stepurhan
04th Mar 2024 09:34

B.R. wrote:

Each stylist arranges appointments, operates the specialist software and processes payment by credit card using their mobile phones. They simply share costs - which surely shouldn't contravene business regulations. The limited company is a vehicle to accommodate the practical issues of trading. They realise that they could solve the problem by having two limited companies, 2 bank account, 2 premises leases, 2 accountancy fees, 2 Paye/NIC systems, 2 electricity meters etc - the list is endless.

With all due respect, the problem is that the company ISN'T just a vehicle to accomodate the practical issues of trading. Not under current arrangements anyway.

Several people, including myself, have explained in detail why. There is also no need to go to the level of separation that you have described to fix the issue. But you seem determined to ignore the fact that there is an issue. All your protestations that them doing very minor things fixes the major problems is just sticking your head in the sand.

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By [email protected]
01st Mar 2024 09:52

Nobody has answered OP's original question - if they get everything sorted out to make it a genuine rent-a-chair arrangement, should the salon thereafter account for VAT on the 60% belonging to the stylist? I'm afraid I've been retired too long to offer an opinion.

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Replying to [email protected]:
Stepurhan
By stepurhan
01st Mar 2024 10:04

Everybody is answering this question by pointing out that it needs to be set up properly for them to exclude the other stylist's income. If they had everything set up properly then the question becomes trivial to answer.

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Replying to stepurhan:
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By Tax Dragon
01st Mar 2024 10:27

I'm not convinced it's so trivial. Especially for me, as I normally steer clear of anything VAT-related.

This doesn't sound like someone renting a chair and competing; it sounds like someone offering a complementary service. Ie it's not standard rent-a-chair and the business splitting element others (possibly most clearly Bobbo) have pointed to cannot be ignored. (And that's assuming you get past the employment point.)

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Replying to stepurhan:
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By B.R.
01st Mar 2024 10:47

See my reply to Bobbo.

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By Yorkshireblue
01st Mar 2024 10:14

I suggest that you consider looking through articles on Chair Rental Schemes through the Hairdressers Journal. They have many, many instances and experiences of schemes that have been reported and considered by HMRC.
From my memory, they had specimen contracts for dealing with PAYE and VAT.

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By [email protected]
01st Mar 2024 14:06

All of the income is through the company. So the VAT threshold will probably be reached.

So I suggest both the owner and the colourist charge the customer and pass the money to the company using the till system to identyfy the source of the money. They then invoice the company for their work. The charge may be at different rates based on how the appointments occured, i.e. repeats etc. The company could charge them a monthly fee for use of the facilities, which may encourage volume increases.

The tow of them would most probably pass the test on remaining self employed and as they, amongst other things, take the risk on the future of their trade.
There would be VAT on the charge invoiced by the company for the facilities but nothing else.

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By Jack the Lad
01st Mar 2024 16:46

See a recent similar question and refer the National Hairdressers Federation.
I would add to the excellent answers already given, that to avoid the VAT office getting you for artificial fragmentation, and to avoid the tax office from taxing you on the whole income:
1. There should be written contracts for service with the colourist.
2. They should have their own PL insurance with their certificate clearly displayed above their chair.
3. If they are renting the chair, the contract should state as much, and the income paid into a separate "trust" account held in joint names, with 40% going to you and on which VAT is payable assuming your total turnover is over the VAT limit, and 60% going to the colourist, who may or may not be VAT registerable.

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