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 This scheme is two decades out of date.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.
Sunday, 15 January 2012
Get the VAT back on clothing
So you have to spend heavily on staff clothing. Golf club gossip says you can claim the VAT back. Is this so? What conditions apply to a successful claim?
Business expense HMRC says VAT incurred on uniforms or protective clothing can be claimed as input tax because it is a business expense.
The wig, gown and bands a barrister is required to wear in court are considered to be a uniform and the VAT incurred is therefore claimable as input tax.
Proving it's a business expense This can be tricky. A VAT Tribunal dismissed the taxpayer's argument that an art consultant required a high dress standard "to create a professional image."
The provision of clothing is normally a personal responsibility. A claim that business reasons require a high standard of dress does not justify allowing the VAT incurred to be claimed as input tax.
In another VAT Tribunal case it was stated "to dress well in order to conform with the standards of a particular lifestyle" was not a business expense.
Rock on! A classic case involved a musician who claimed the VAT back on a wig! HMRC paid him a visit (enough to raise anybody's follicles) and disallowed the VAT. He claimed the wig was needed to maintain his image as a musician. Photographs, posters, record and cd covers, press releases, and artwork (on which his business relied) would all need reprinting if his appearance changed.
He appealed to the VAT Tribunal who decided the wig had indeed been purchased for the purpose of his business and he could reclaim the VAT.
The VAT on clothing used solely as stage costumes is reclaimable. Ordinary clothing worn by an entertainer or celebrity will usually be worn privately as well in which case the VAT is NOT reclaimable.
Treat it as a gift Use the business gift rules to claim back the VAT on "perk" clothing (neither uniforms nor protective clothing). Perks are an accepted business expense so if you provide your staff with clothing the VAT incurred is a business expense. However, if the clothes cost more than £50 in any twelve-month period, you will have to account for output VAT on their value. Make sure the clothes are worth less than £50 excluding VAT.
Business expense HMRC says VAT incurred on uniforms or protective clothing can be claimed as input tax because it is a business expense.
The wig, gown and bands a barrister is required to wear in court are considered to be a uniform and the VAT incurred is therefore claimable as input tax.
Proving it's a business expense This can be tricky. A VAT Tribunal dismissed the taxpayer's argument that an art consultant required a high dress standard "to create a professional image."
The provision of clothing is normally a personal responsibility. A claim that business reasons require a high standard of dress does not justify allowing the VAT incurred to be claimed as input tax.
In another VAT Tribunal case it was stated "to dress well in order to conform with the standards of a particular lifestyle" was not a business expense.
Rock on! A classic case involved a musician who claimed the VAT back on a wig! HMRC paid him a visit (enough to raise anybody's follicles) and disallowed the VAT. He claimed the wig was needed to maintain his image as a musician. Photographs, posters, record and cd covers, press releases, and artwork (on which his business relied) would all need reprinting if his appearance changed.
He appealed to the VAT Tribunal who decided the wig had indeed been purchased for the purpose of his business and he could reclaim the VAT.
The VAT on clothing used solely as stage costumes is reclaimable. Ordinary clothing worn by an entertainer or celebrity will usually be worn privately as well in which case the VAT is NOT reclaimable.
Treat it as a gift Use the business gift rules to claim back the VAT on "perk" clothing (neither uniforms nor protective clothing). Perks are an accepted business expense so if you provide your staff with clothing the VAT incurred is a business expense. However, if the clothes cost more than £50 in any twelve-month period, you will have to account for output VAT on their value. Make sure the clothes are worth less than £50 excluding VAT.
Avoiding registration by splitting
So your business is growing. You want to avoid having to register for VAT. The golf club gossip is that you can avoid registration and save VAT by splitting your business. Is this true?
Close to VAT threshold A common problem for a small business dealing directly with the public and approaching the VAT registration threshold (currently £73,000), is how can they pass on the 20% VAT charge without losing business or reducing profit by absorbing the additional cost themselves.
Example V Gogh is a one man band painter and decorator dealing largely with private individuals. Lately, he's also been winning some commercial contracts and this pushes him close to the registration threshold. If he registers, he'll have to put up his prices to domestic customers by 20% or absorb it. Can he avoid VAT registration?
Split the business He could split the business in two, one part dealing with commercial contracts and the other with work from private individuals. How can he achieve this without upsetting HMRC?
TIP If he's going to split the business, it must be real and not just on paper. He needs to set up a limited company or partnership to deal with the commercial contracts while continuing to run the domestic side as a sole proprietor. Each side - commercial and domestic - has its own bank account, accounting records and purchases are all made through the correct legal entity and NOT by having a common stock for both businesses.
What can HMRC do? If he does all this and continues doing it, HMRC can only issue him with a direction ( a disaggregation direction) to treat the businesses as one from a current date.
TIP If he splits the business properly. he can still save all the VAT up to the time HMRC issue him with a direction.
Beating HMRC If he can show HMRC the two businesses are not economically connected, he may avoid registration altogether (assuming both businesses remain below the registration threshold). For example Wilf, a sole proprietor runs a gas fitting business and sells used cars on the side. The combined turnover of both businesses counts towards his VAT registration threshold. However, if he puts one into a limited company or partnership the turnover of each business will be looked at separately and HMRC cannot direct them to be treated as one.
WARNING If Wilf gets it wrong....doesn't have separate bank accounts etc, HMRC will say there never were two business and compulsorily register him from a much earlier date. Wilf will then have to account for all VAT on all the turnover of both businesses from the day their combined turnover exceeded the VAT registration threshold, plus penalties and interest.
TIP This type of VAT planning is common in the licensed trade where, typically, the wife runs the food side as a separate, unregistered business. If you are doing something similar (sharing premises) make sure you charge rent to the unregistered business in exactly the same way as you would to a third party.
Close to VAT threshold A common problem for a small business dealing directly with the public and approaching the VAT registration threshold (currently £73,000), is how can they pass on the 20% VAT charge without losing business or reducing profit by absorbing the additional cost themselves.
Example V Gogh is a one man band painter and decorator dealing largely with private individuals. Lately, he's also been winning some commercial contracts and this pushes him close to the registration threshold. If he registers, he'll have to put up his prices to domestic customers by 20% or absorb it. Can he avoid VAT registration?
Split the business He could split the business in two, one part dealing with commercial contracts and the other with work from private individuals. How can he achieve this without upsetting HMRC?
TIP If he's going to split the business, it must be real and not just on paper. He needs to set up a limited company or partnership to deal with the commercial contracts while continuing to run the domestic side as a sole proprietor. Each side - commercial and domestic - has its own bank account, accounting records and purchases are all made through the correct legal entity and NOT by having a common stock for both businesses.
What can HMRC do? If he does all this and continues doing it, HMRC can only issue him with a direction ( a disaggregation direction) to treat the businesses as one from a current date.
TIP If he splits the business properly. he can still save all the VAT up to the time HMRC issue him with a direction.
Beating HMRC If he can show HMRC the two businesses are not economically connected, he may avoid registration altogether (assuming both businesses remain below the registration threshold). For example Wilf, a sole proprietor runs a gas fitting business and sells used cars on the side. The combined turnover of both businesses counts towards his VAT registration threshold. However, if he puts one into a limited company or partnership the turnover of each business will be looked at separately and HMRC cannot direct them to be treated as one.
WARNING If Wilf gets it wrong....doesn't have separate bank accounts etc, HMRC will say there never were two business and compulsorily register him from a much earlier date. Wilf will then have to account for all VAT on all the turnover of both businesses from the day their combined turnover exceeded the VAT registration threshold, plus penalties and interest.
TIP This type of VAT planning is common in the licensed trade where, typically, the wife runs the food side as a separate, unregistered business. If you are doing something similar (sharing premises) make sure you charge rent to the unregistered business in exactly the same way as you would to a third party.
Channel Islands loophole closes
HMRC withdraws the Low Value Consignment Relief (LVCR) from April 1, 2012. What you need to know.
VAT-free Under LVCR goods having a value of less than £15 can be imported free of Vat. Many high street retailers have exploited this concession to set up operations (typically in the Channel Islands) to sell mail order Cds, Dvds, books and small items. Although this is good for consumers, it badly hit small independent traders unable to compete with the big boys.
Better for all? Under pressure from small business associations HMRC hs announced that from April 1, 2012 LVCR will no longer be available to goods imported into the UK from the Channel Islands. The government state this will bring increased fairness to businesses, benefit the economy and protect millions in tax revenue. Let's see what happens to the price of Cds etc!
Stage Change At first the government reduced the LVCR threshold from £18 to £15 with effect from November1, 2011 and this applies until April 1, 2012.
VAT TIP The change to LVCR does not affect the existing import reliefs for gifts from outside the EU, including the Channel Islands, which apply to non-commercial consignments eg gifts sent to family members or friends.
VAT-free Under LVCR goods having a value of less than £15 can be imported free of Vat. Many high street retailers have exploited this concession to set up operations (typically in the Channel Islands) to sell mail order Cds, Dvds, books and small items. Although this is good for consumers, it badly hit small independent traders unable to compete with the big boys.
Better for all? Under pressure from small business associations HMRC hs announced that from April 1, 2012 LVCR will no longer be available to goods imported into the UK from the Channel Islands. The government state this will bring increased fairness to businesses, benefit the economy and protect millions in tax revenue. Let's see what happens to the price of Cds etc!
Stage Change At first the government reduced the LVCR threshold from £18 to £15 with effect from November1, 2011 and this applies until April 1, 2012.
VAT TIP The change to LVCR does not affect the existing import reliefs for gifts from outside the EU, including the Channel Islands, which apply to non-commercial consignments eg gifts sent to family members or friends.
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