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VAT: The Big Conversation | Ruth Lundstrom

May 10, 2024

CEO & Founder of the Freelance Suite app, Ruth Lundstrom, addresses the ongoing VAT issue.

With the Spring Budget recently announced, there has been a lot of discussion over the past few months about VAT and how it’s affecting the industry. But does it really affect all of us? Considering that the industry has recently seen huge growth in the freelance sector, there has been a subsequent drop in VAT-registered hair businesses. So, what does this mean for freelancers?

For the past 10 years, VAT hasn’t been much of a concern for freelance hair stylists because the official threshold (the point at which you must register for VAT) was fairly high in comparison to what the average freelancer would turnover per year. Until two months ago, that threshold had been stagnant at £85,000 since 2017. In some relief to many freelancers, however, the Spring Budget revealed the government’s decision to raise the threshold to £90,000.

Whilst this isn’t a big move, it’s a small win that certainly gives many freelancers some breathing room.

Let’s dive in deeper…

What is VAT?
VAT is a tax that is added to the price of your services, it is paid by the client. For example, if the price of your blonde package came to £300, as a VAT-registered stylist you’d then add VAT to create the final price. (Typically, this is 20%, but it can differ depending on which VAT scheme you’re eligible for.) This makes the end price £360, £60 of which is passed onto HMRC. On the standard VAT scheme, you can also claim back any VAT you have paid on goods and services that you’ve purchased to run your business – this includes the VAT on your colour, styling products or tools, for example.

It’s crucial to remember, however, that VAT is not money you have earned. It is a tax added that the client pays and you are to pass on.

You could, if you wanted to, absorb the VAT from your services, but this is something I would strongly advise against as a long-term plan. This would mean you start eating into your profit margins or, even worse, eating into your wages.

Why is VAT killing businesses?
It’s not. Absorbing VAT into your profits is killing the business.

If you’ve ever seen me break down a price for any of my services, you will notice that I leave absolutely nothing out. I charge for every towel and every foil – even every coffee pod! This isn’t because I’m mean-spirited or tight, it’s because they are part of the costs it takes to run the business, and any costs need to be priced in. If it isn’t priced in, then it’s going to eat into your profit margins – it’s as simple as that.

Is it hard and scary to increase prices again? Yes. Is it necessary? Yes.

Why you need to be aware of VAT in 2024
The VAT threshold from April 1st, 2024, has increased by £5000 from £85,000 to £90,000. The cost of goods has risen. Ultimately, this likely means you will start getting closer to hitting the VAT threshold (if you haven’t already). With this in mind, it’s super important that you keep an eye on your turnover and opt into the Flat Rate Scheme as soon as you hit that £90k mark, this will allow you to transition smoothly.

By not keeping an eye on your annual turnover, you could reach the end of the year and find out you not only have a tax bill to pay, but a VAT one too!

Don’t ignore your numbers in your business, get to know them. The more you know, the more likely you are to grow.

My prediction for the VAT cut…
With more of the big salons closing, the government is losing VAT revenue – this is something they will want to make up fast! Whilst I don’t think we will see a VAT cut this year, I’d be surprised if the next government didn’t move to lower the threshold. Until this happens, you have £90,000 of turnover before you have to register for it.

Even with the adjusted VAT threshold, there will be more and more freelancers that end up VAT registered purely because the costs of running their business have risen. With running costs increasing, costs of service must increase too, thus bringing more people into that £90k+ turnover (especially if you’re an extensionist!).

One last tip
Don’t be scared of VAT, be educated. Fear starts where education ends!

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