VAT position

The services offered by the typical hairdressing salon are standard rated for VAT purposes.

The supply of hairdressing services to the public may take different forms:

• stylists are employees of the salon. The salon supplies hairdressing services to customers and accounts for output tax on the full amount of the income received
• stylists are self employed contractors supplying their services to the salon under contracts for services. Their services are supplied to the salon which then supplies hairdressing services to customers and accounts for output tax on the full amount of the income received. The stylist accounts for output tax on the services provided to the salon if the value exceeds the current threshold for VAT registration
• stylists are independent principals who supply hairdressing services direct to their customers. In this case the salon makes a charge to the stylist to cover the agreed provision of services such as the use of an area, furniture, water, hairdressing products etc. (Known as the 'chair rental'.) The stylist accounts for output tax on the gross takings received if the value exceeds the current threshold for VAT registration. The charge paid by the stylist to the salon is a consideration for the supply of services. The liability of the supply may vary depending on the arrangement agreed between the stylist and the salon. Where, under the terms of a written agreement, stylists operate their entire business from a separate and designated part of the premises (e.g. a separate room) there is an exempt supply of a licence to occupy land. In other cases Customs considers that the salon is making a standard rated composite supply of services to self-employed stylists for an agreed consideration

The nature of the supply has been the subject of numerous Tribunal decisions and in an attempt to clarify the situation a set of guidelines was agreed between Customs and the National Hairdressers' Federation in 1992. These list practices which Customs accepts indicate that the supply of hairdressing services is made by the stylist direct to the customer. As this is a complex area it is strongly recommended that specialist advice is sought.

There is no VAT due on any gratuity made at the customer's discretion.

A new, optional flat rate scheme (FRS) for eligible small businesses was announced in the April 2002 Budget. Under this scheme tax invoices continue to be issued to VAT registered customers, but the VAT payable to Customs & Excise is calculated as a percentage of the business's VAT inclusive turnover, applying the appropriate flat rate percentage for the trade sector in question. The scheme cannot be used with the retail schemes, the margin scheme for secondhand goods or the cash accounting scheme. Full details of the FRS, eligibility criteria and the flat rate percentages are contained in VAT Notice 733, Flat rate scheme for small businesses.

Further information and guidance can be obtained from local VAT Enquiry Offices.