Salon and Barbershop Owners Call On The Government For An Immediate Cut In VAT

Salon and barbershop owners are calling on the Government for an immediate cut in VAT to 10% in the Spring Budget (due 6 March 2024).

Currently, salons and barbershops which operate a rent-a-chair model usually fall below the VAT threshold, therefore many salon and barbershop owners have found themselves considering a rent-a-chair model or closing their businesses. A recent survey by the Salon Employers Association recently found that nearly 1 in 5 salon owners have admitted being close to a mental and emotional breakdown; co-founder and owner of The Chapel Salon in Tunbridge Wells, Toby Dicker recently appeared on ITV News to discuss the current crisis: "More than half the people are really struggling mentally and having sleepless nights... of all of the personal bankruptcies in the UK, 24% are attributed to our sector - this is the pressure we're under."

Speaking to ITV News, a HM Treasury spokesperson said: "Our decisive action helped to more than halve inflation last year, which is protecting businesses around the country from higher costs that they would have otherwise faced. We've also recently extended measure to support hairdressers including a 75% reduction on business rates bills." 

An independent discussion paper by Pragmatix Advisory Ltd, commissioned by the National Hair & Beauty Federation (NHBF) was published in January; Avoiding the cliff edge: considering possible options for a VAT threshold smoothing mechanism sets out possible options for the future rather than recommending just one solution for a change in the current VAT system. The aim of the paper is to generate discussion within the hairdressing and beauty sector, with the government and other industry organisations.

Caroline Larissey, Chief Executive of the NHBF says: “93% of hair & beauty sector businesses are below the VAT threshold, some of which engage in cash-in hand work, split the business or engage self-employed workers to avoid having to register and pay VAT.

“We have advocated a smoothing mechanism as part of our campaigning on VAT but this is the first time we have set out a range of options for how it could work. The presence of the cliff edge within the current VAT regime creates incentivises businesses to remain below the threshold, forgo much needed growth and produce a lower tax yield for HM Treasury. The report does not make specific recommendations; it is a discussion paper for debate and to engage further with our members and inform further dialogue with the government and other industry organisations.”

Rebecca Munro, Pragmatix Advisory: "Our research is based on careful analysis of official data – from the Office for National Statistics and the Department for Business and Trade – which show the number and turnover of businesses in different industries. It shows that around 47,000 firms in the United Kingdom are holding back below the £85,000 VAT turnover cliff edge – and avoiding the cost and inconvenience of this blunt fiscal instrument."

VAT: A Look at the Current System

Value Added Tax (VAT) is the tax that all business’ must pay when their turnover is higher than £85,000. It is added to the price of most goods and services you buy and is a way for the government to collect money to pay for public services like schools, hospitals and roads. Along with income tax and national insurance, VAT is one of the largest contributors for these essential public services. The £85,000 mark is known as the VAT threshold and the United Kingdom has one of the highest thresholds in Europe.

The current VAT rate of twenty per cent leads to a cliff edge for businesses at the threshold of £85,000. Because there is no gradual increase many businesses find the transition to VAT too challenging thus making growth more difficult. Plus, many businesses deliberately stay under the VAT threshold, with some using tax avoidance measures (cash in hand, for example). This potentially reduces overall economic activity for both the businesses and reduced tax revenues for the Treasury.

Jonny Haseldine, Policy Manager at the British Chambers of Commerce said: "We have long advocated a smoothing mechanism around the VAT threshold, particularly one that minimises the administrative burden on business. We are currently assessing the options and this contribution from the NHBF is welcome food for thought."

Andrew Goodacre, CEO at the British Independent Retailers Association also commented on the NHBF's report, stating: "We support the proposals outlined in this report modelling different smoothing mechanisms. A review of the VAT thresholds and smoothing mechanisms is long overdue.  Many independent retailers already sit above the VAT threshold so we anticipate few problems for them with this change in regime, and some of the smaller ones should see some benefits".

The Industry's View

A significant number of small businesses, across different sectors, would like the current VAT system to change. Previous NHBF State of the Industry surveys in 2023 asked the hair and beauty sector businesses for their thoughts on the VAT threshold and  views were mixed, including:

• 86% of hair and beauty businesses supported a graduated approach.
• 50% say that a reduction in VAT would be most beneficial for their business.
• 25% say that raising the VAT registration threshold would help their business.
• 7% felt that lowering the threshold would help their business.
• 17% of sector businesses are signed up to the VAT flat rate scheme.

The Salon Employers Association is asking hairdressers and salon owners to send their MPs an urgent message asking the government to reduce VAT in the spring budget, with industry leaders such as Errol Douglas getting behind the cause. Posting to Instagram Errol commented: "It's really essential for those of us in the hairdressing and the beauty community to come together, because when the budget comes this Spring we desperately need it [the VAT] to be reduced to 10%. We need to have one voice."

Salon Employers Association member, Salv Mulé, is one of many who have been tweeting their local MP stating: "Our hair and beauty industry is in a crisis, and we need an emergency cut in VAT to 10%. This needs to happen to save tens of thousands of jobs. Our industry is already drowning in ongoing rises like our rents, our rates, our utilities and our wages... this means we can no longer afford full time apprentices... our industry is already declining fast as we speak." 

Anthony Laban, hairdresser and presenter of The Noble Barber podcast, also shared his response from local MP for Tooting, Dr Rosena Allin-Khan who wrote: "I know that several organisations have raised concerns about a disparity when it comes to VAT between salons with employees and those that use a self-employed 'rent a chair' model... I know the Government has recently been asked further questions on this issue and I can assure you that I will continue to monitor it."

You can find out more about the VAT threshold here.