Hi, I’m Melanie Beach from The Salon Expert Accountant, and today I want to help you understand when to register for VAT and which VAT scheme may suit your salon business best.
VAT can be a source of anxiety for many salon owners, especially when they near the VAT threshold. But don’t worry—I’m here to give you some clarity and practical advice.
The VAT Threshold: What You Need to Know
The VAT threshold currently stands at £90,000, which means that once your salon’s turnover hits this amount in any 12-month rolling period, you are required to register for VAT. Importantly, this 12-month period isn’t tied to your financial year or the tax year—it’s a rolling 12 months, so you need to keep track monthly to ensure you don’t accidentally exceed the threshold.
The Challenge for Hair and Beauty Salons
One of the unique challenges of the hair and beauty industry is that your clients are unlikely to be VAT-registered themselves. This means that once you register for VAT, you either need to raise your prices by 20%—which can be difficult—or absorb the cost and essentially take a pay cut. For many salon owners, this presents a tough decision.
Navigating the VAT Danger Zone
I like to call the £90,000 to £120,000 turnover range the “danger zone.” Here’s why:
- Between £90,000 and £120,000: If you don’t raise your prices by 20%, you’ll end up earning less money once you factor in VAT.
- Above £120,000: At this level, you’ve broken through the ceiling. You’re generating enough income to comfortably cover VAT without it feeling like a burden.
However, if your business is likely to remain just above the £90,000 mark and not go far beyond it, staying VAT-registered may not be the best option. In fact, it may be worth considering staying just below the threshold if you don’t anticipate significant growth. Professional advice is crucial here because every situation is unique.
Which VAT Scheme is Right for Your Salon?
If you’re preparing to register for VAT, the next question becomes: Which VAT scheme should you choose? There are two primary options: the Flat Rate VAT Scheme and the Standard VAT Scheme.
1. The Flat Rate VAT Scheme
The flat rate VAT scheme is designed to simplify VAT for small businesses, making bookkeeping easier. You charge 20% VAT on your services but only pay HMRC a fixed percentage—around 13%. This can be ideal for smaller salons with turnover below £150,000 and not many VAT-related expenses. However, under this scheme, you can’t claim back VAT on most items unless they cost over £2,000.
2. The Standard VAT Scheme
With the standard VAT scheme, you charge 20% VAT on all goods and services but also reclaim VAT on your business expenses. This scheme is typically more beneficial for salons with higher VAT-registered expenses. For example, if you pay VAT on your rent or on expensive supplies, the standard scheme may allow you to claim that back, offsetting your VAT liability.
Which Scheme is Best for You?
There’s no one-size-fits-all answer. The best VAT scheme for your salon depends on various factors, including your business’s size, growth plans, and the types of expenses you incur. For instance, if you pay VAT on significant expenses like rent, the standard scheme may be more beneficial. But if your expenses are minimal, the flat rate scheme could save you money in the long run.
Key Takeaway: Get Professional Advice
Making the right decision about VAT can significantly impact your salon’s profitability. That’s why it’s important to seek advice from an accountant who specializes in the hair and beauty industry. With my experience working with countless salon owners, I can help guide you through the decision-making process and ensure you’re on the best path for your business.
Ready to Take Action?
If you think your turnover is approaching the VAT threshold or you’re unsure which VAT scheme is best for you, don’t hesitate to reach out. You can contact me through this website at www.salonexpertaccountants.co.uk and book a discovery call. Or, email me at hello@thesalonexpertaccountants.co.uk. I’m here to help!
By staying informed and getting the right advice, you can make VAT work for your salon—not against it.
