Chair Rental Challenge

Many salon owners overhearing golf club gossip think if they rent a chair to an operative the rental is exempt from VAT. This is NOT so, but some VAT savings can be obtained. How?


Chair rental Basically the idea is to make your operatives self-employed and then rent them a chair in your establishment. Rents are exempt from VAT and - hey presto! - there's no VAT to pay on the rental income. The proprietor's taxable turnover falls below the de-registration threshold (currently  £73,000) so they can de-register and save on their own salon earnings as well. Sounds too good to be true.


WARNING It is! This scheme is two decades out of date. The reality is the operatives are paying for a range of services they use in the establishment all of which are standard-rated. The bad news is that you have to account for output tax on the income from your operatives.


The nature of this supply has given rise to numerous tribunal decisions culminating in a set of guidelines issued as long ago as 1992 between Customs and Excise (as it was then called) and the National Hairdressers' Federation which treats this as a standard-rated supply to carry on business in the establishment, including use of the chair and access to other facilities rather than an exempt licence to occupy.


Perm solution In a February 2011 case (Glen-Jones t/a Sophisticuts which can be read here) Mrs Glen-Jones argued that chair rental supplies made to independent operatives were exempt supplies of a licence to occupy land. 


HMRC countered by arguing it was a supply of hairdresser's facilities taxable at the standard rate.


The First Tier Tribunal found the supply to be essentially a taxable supply of hairdressing services and the non-exclusive right of an operative to occupy the basement was merely a minor element of that supply.


Are the operatives self-employed?  In a recent case the First Tier Tribunal commented that had the tenancy agreement been correctly drafted, it could have seen two supplies - a licence to occupy land and a supply of supporting services. VAT exemption would have applied to the licence to occupy land if the plan attached to the agreement had clearly identified the occupied area AND the references to the ancillary services had formed part of a separate VATable service contract.


TIP Separate the licence to occupy land from from the supply of any other services. Draw up proper legal documents identifying the area each operative occupies on a plan. Have a fixed rent, not one based on a share of each operative's takings.