New rules being introduced by the UK government, under the term ‘Making Tax Digital’, mean that UK-based businesses with a turnover exceeding £85,000 over a period of 12 months – a category which most salons would fall into – will have to keep VAT records in digital format, and do VAT returns using software from April 2019.
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HMRC VAT Rules For Salons (Hairdressers, Beauty Spas, Nail Salons, etc.)
Salon services like hairdressing, spa treatments, manicures, etc. are all subject to the standard VAT rate, which is currently 20%. Retail products are also subject to the standard rate of 20%.
What Is VAT, And Why Is This Important To You As A Salon Owner?
VAT (value added tax) is a tax on consumer spending; so the tax is payable to the UK government (HMRC) each time consumers (like your clients) spend money on goods or services, like haircuts, treatments, products, etc. As a business, you are essentially the middle-man, and you have the responsibility to collect or charge VAT on all the services and goods you sell at your salon (known as output tax), and give that to the HMRC at the end of each quarter.
By registering your business for VAT, however, you are also allowed to subtract any VAT you pay for goods and services from other businesses, like when you buy products from your suppliers (known as input tax). In this scenario, you only owe the HMRC the difference at the end of each quarter; i.e.:
[Your output tax (VAT you collected from your customers)]
– [subtract your input tax (VAT you paid to suppliers)]
= [The VAT return you owe to the HMRC]
It’s extremely important to keep a month-on-month accurate record of your input and output VAT. If you fail to do so, you run the risk of losing money by failing to correctly subtract your input tax and paying too much. You’d also want to make sure you pay accurate VAT returns to the government so you’re not convicted of tax fraud and slapped with a big tax bill and penalties.
Using Phorest Salon Software Can Help You Comply With Making Tax Digital!
The good news is, if your salon or spa uses Phorest Salon Software, it comes already set up with the standard tax rate applied in your settings. This means it will automatically add 20% VAT to all of the services and products you sell when you use Phorest to process sales; so your output tax is constantly tracked in Phorest. The system will also add 20% VAT to your orders, which will enable you to keep track your input tax.
Getting This Information To Your Accountant And To The HMRC
At the end of each quarter, you will need to run Phorest’s new finance report, which will total your input and output VAT payments and sales.
This can then be exported to a CSV file and either given to your accountant or used by you and imported into your accounting software (such as Quickbooks Online, Xero, etc.). Under the requirements of Making Tax Digital, it’s important that you use accounting software – not hard copy. Last step, you visit https://www.gov.uk/send-vat-return to complete your return.
Phorest Salon Software is working on directly integrating with the most popular accounting software tools, which will allow your VAT records to be automatically synced and save you from having to complete the export and import step we described above. We’ll give you an update on this release as soon as possible.