Self-Employed Hair Stylists and VAT

Many hair stylists consider themselves to be self-employed. They pay their chair rental to the salon owner and treat the money that they take from the end client as their own income rather than salon takings. The problem will occur when they have not followed through with the
guidelines written up by HMRC and the National Federation of Hairdressers (NFH) and in the department’s VAT Taxable Person Manual to establish the business association between the two parties.

An HMRC inspector will start to form an opinion of the relationship from the moment they enter the premises. They will expect to see a clear choice shown to the customer at the reception, allowing them to deal with the salon or independent stylist.

Normally, the inspector would expect a self-employed stylist to display their name in the work area they rent. This could be as simple as a piece of paper with their name and contact details, or similar, by the mirror of their chair. Alternatively, a list of independent stylists, alongside any specialisms, should be displayed in the reception area. This requirement is necessary but is often not adhered to. The end user must be fully aware that they are using the services of an independent stylist. It should be clear that all complaints and claims will be dealt with by the independent stylist and their insurance providers, not under the salon’s procedures.

On the subject of the agreement between the salon and hairdresser (the ‘Contractor’), the HMRC/NFH guidelines say:

  1. There should be a clear agreement in writing between the salon and the Contractor that accurately reflects actual working practice.
  2. There should be a clear statement in respect of the term of the agreement, and the obligations and responsibilities of the parties on termination, notice required on termination and where that notice is to be served.
  3. That VAT is to be levied (when applicable) on the charge paid by the Contractor for the services provided by the salon.
  4. The Contractor is responsible for insuring the enterprise against public and product liabilities, losses that could arise as a result of theft, fire, storm, accidental damage etc, and statutory cover in respect of staff retained by the enterprise.’

Any inspector worth his salt will ask to see the contract between the salon and the stylist. In some smaller salons, a written contract is often overlooked in favour of verbal agreements. Although there is a cost involved in the former, failure to have a written contract would be very foolish as an unsuccessful separation of the two parties could result in all money taken by the salon and the stylist being liable to VAT.

The contract

So, what should the contract contain? The inspector will ask whether the stylists are self-employed. This must be the case. An employee cannot establish an independent business within an employer’s establishment. According to the guidelines from HMRC and the National
Federation of Hairdressers, each stylist must be responsible for many areas of their work environment including the following aspects.

  • Maintenance of their own books and accounting records.
  • Being responsible for their own taxation affairs, health and safety procedures.
  • Attending to their own insurance requirements, including public liability insurance.
  • Being capable of suffering losses (negative profit) as well as enjoying profits.
  • Having complete freedom to establish their own price structure and times of opening (including closure for holidays).
  • Purchasing consumables and products from any source, and selling any product range.
  • Able to compete openly for clients both inside and outside the salon, and to accept or reject clients at will.
  • Being free to appoint locum stylists as the need arises.
  • Being free of restrictions about the sale, disposal or relocation of the business.
  • Displaying a notice giving the name of the contractor and address at which documents may be served as required by the Business Names Act 1985, s 4.
  • Responding to actions brought against it by third parties.
  • Having its own stationary for business letters, written orders, invoices and receipts.

Working conditions of the stylist

The stylists should have access to their business at all times and have the ability to open for clients at any time of their choosing. They must be responsible for their conduct, appearance and presentation and the client records should be the property of the stylist, not the salon. Some
of these areas can often be sticking points for some independent contractors, but it can be argued that, if the vast majority of the other clauses are adhered to, some of these points are not essential.

HMRC officers are encouraged to collect as much background information as possible if inconsistencies exist. The department does not concentrate only on the accounts for both parties, but the practical application of daily practises. It asks staff to examine the accounts of
the stylists, checking that their total turnover is declared as sales and fees paid to the salon are shown as an expense. It requires officers to look at the rules of the salon and any restrictions placed on stylists who are trading within the business environment. All these pointers will provide the department with information to determine whether the supply from the stylist is to the salon or the customer.

Tribunal decisions

There have been many tribunals looking at the case of self-employed and employed status. In S Taylor (Machine Tools) Ltd (LON/92/860A), previously employed stylists had become self-employed stylists, supplying their customers directly. Unfortunately, many of the agreements
were neither signed or adhered to in practise and the agreements were deemed to be of little value. Because the ‘burden of proof’ was with the salon, and the background evidence was confusing or inconsistent, the tribunal found for HMRC. This was a classic case of the stylists not
attending to red tape which resulted in them being deemed as supplying their services to the salon rather than their individual customers and consequently VAT would be due on the cumulative sales of the whole salon.

In January 2003, there was a High Court ruling in the case of Kieran Mullin Ltd v CCE [2003] EWHC 4. Here it was ruled that self-employed stylists using the ‘chair rental’ agreement were supplying hairdressing services to the customer even though their written agreements did not fall within the federation guidelines. The High Court decision has made life a lot easier for us to protect our clients’ intentions. If the stylist is supplying the customer, not the salon, the findings here are helpful. However, HMRC’s official line to those citing this case is to refer to the many contradicting tribunal decisions over many years relating to this matter. The department will strongly hold its ground relating to the question of to whom the supply is made?

If you feel your business may need further advice on this matter please contact us for a consultation.