Salon VAT Threshold Management | Build Your Salon

Hitting 90,000 in turnover should be a moment that you celebrate. For me, it nearly became the thing that ended my business. Here's why and how to make sure it doesn't happen to you. All on Build your Salon. Hello, hello, hello. My salon friends, Phil Jackson here, your Queen of Salons coming all over the internet with a great big dose of my Wise Owl wisdom. How on earth are you achingly well, I hope. How is April treating you? I hope you're going from strength to strength. I'm finding actually there's some good stories out there at the moment. People seem to be coming out of hibernation a little bit. It's getting a bit more social, more worried about what their toes look like, what their waxing looks like, and starting to spend some money in salons again. And I hope that's the same for you. Why not reach out and let me know. You know, I love hearing from my salon owner friends. Anyway, so what are we talking about today? Can you see, I'm spinning out the intro a little bit, my darlings, it's because I don't want to talk about this. It's one of those topics that I was a bit worried it was going to be a bit dry. And also it does make me look like a bit of a fool because I ought to know better. So we're talking about VAT but this isn't hypothetical. I'm not going to give you a cautionary tale from a fictional salon owner I invented to make a point, this is what happened to me. So how did I get myself in a pickle? Well, I did a very poor job of delegating. I did what you should never do, my darlings, which is abdicate. I trusted my accountant to stay on top of my books. And the thing was, before we had, before I was VAT registered, I didn't need to stay on top of my books terribly. As long as the year end was up to date, then it was absolutely fine. And that seemed to be the attitude that my accountant had as well. So what happened? Well, I crossed the VAT threshold and didn't find out for nine whole months, that's nine months of revenue that I had taken and spent and pulled wages out and paid rent with, and hadn't set aside a single penny for VAT because I didn't know I was meant to. So when it landed, I ended up with a huge backdated VAT bill and it nearly destroyed my business. And the worst part, of course, is that it was completely avoidable, not by being smarter, just by understanding how VAT works and from a few of the tips that I'm going to share with you. So let this be a cautionary tale. I always say that the lessons that we learn and remember are the expensive ones. Why not let my expensive lesson be a lesson for you as well? Let's talk VAT. Let's talk about it properly. So most people think that the VAT threshold works like the tax year. So every year we get a shiny new lot of allowances for our personal allowances. And a lot of people think the VAT threshold resets in April and you've got a fresh start or that it resets with your company year end, and that is incorrect. The 90,000 threshold is based on a rolling 12 month period. So not your annual accounts, not the tax year. Every month you are supposed to look back at the last 12 months of turnover. And as soon as that figure creeps over 90k, it's time to start the clock. So let's say at the end of May, you check back over the last 12 months and your turnover has been 88,000, fine, no VAT. Let's say at the end of June, you check again and you've crossed 91,000 while you are over the threshold. And from that moment, my understanding, and this is only my understanding, my darlings, if you think you can get proper financial advice from a free podcast, you are daft. So please take this as a cautionary tale, but you need to speak to your accountant about this. But my understanding is that you've got 30 days to notify HMRC and then your registration date kicks in from the first day of the second month after you've crossed the threshold. So let's say you cross the threshold in June, you notify by the end of July your VAT registered from the 1st of September. So here's where it goes wrong, is that most salon owners aren't doing that monthly check or they're doing what I was doing, which is passing it all onto someone else to keep an eye on it, getting on with running the business, assuming somebody will pick up the phone if something needed attention. HMRC don't start your liability from the dates that you eventually register, though. They backdate it to when you should have registered. So every pound of revenue you took between then and now, they want their chunk of it, which is usually 20%. And because you weren't charging VAT to your clients, the money doesn't come from the clients, it comes straight out of your pocket. So in my case, that was nine months of turnover, tens of thousands of pounds money had already spent and no money put aside for it. Now I was in a very lucky position. I have reserves in my business ever since COVID and lockdown, I've been building a pot of money for business emergencies. So I managed to scrape by, but it cleaned me out, or basically everything that I'd put aside for a rainy day was gone. So please take it from your Uncle Phil at the end of every month. Check your 12 month rolling turnover. That one habit is worth more than anything else that I'm going to share in this episode. If you find that you have already crossed the threshold, don't panic, but you do need to move fast. And if that sinking feeling's hitting you, here's what you need to do: first, work out when you actually cross the threshold. Go back through your records month by month. Your salon software can help you with these turnover figures and find the exact point where your 12 month figure went over 90k. Second, call your accountant and let's make the disclosure to HMRC. If you get in first, it shows HMRC that you're fixing the problem, not hiding from it. It's not going to make the bill disappear, but it can actually stop you getting any penalties on top. And of course, once you've registered for VAT, then we can go back through your purchases and see where we might be able to reclaim VAT on those purchases before you registered. So all of the things that you bought, like equipment and stock, or if you've got a coach who's VAT registered, you'll be able to claim the VAT for the time where you should have registered. But actually some of these things you can claim before you've registered. So if you were buying, let's say you were refurbishing a premises, you can backdate some of those costs and get the VAT back out. So dig out all of your old receipts, speak to your accountant and see how we can reduce your VAT bill. The worst thing you can do is nothing. The other thing I have found through my own experience is that if you keep talking to HMRC, they're okay. If you try and speak to them about maybe you need a payment plan, you need to spread out your payments over three months, six months, nine months, a year. They tend to be very amenable as long as it's coming from you. If they have to chase you for conversations, they seem to be a lot less willing. But let's be really honest, and this is something that one of my ex coaching clients taught me, is if they push you to the point of bankruptcy, HMRC get nothing, they don't want to see you go out of business. So generally when it comes to things like payment plans, they tend to be fairly amenable. But ideally what we want to have is a situation where we're planning ahead so we can see that we're not over that 90k horizon just yet, but we can see that it's coming. That gives you time to do things properly. And the thing that terrifies salon owners is the price increase. Adding 20% to your fees feels like handing your clients a reason to leave. And honestly, a 20% jump overnight is a shock to the system. But that's not how we need to do it. If we can see this coming over time, we can start now. We can start with smaller increases regularly, maybe three or 4% every six months, which becomes almost invisible to your clients. Your clients see it as inflation, rising product costs, the general cost of living. So by the time you register, your prices are already much closer to where they need to be and the final adjustment is much smaller. So then we don't need to announce to our clients that we become VAT registered, we just have new prices. Those new clients don't know the difference. Your loyal clients have been absorbing those smaller rises. They're not going to blink either. VAT registered signals that your business is established and growing. It's not punishment. This is a milestone, but it does mean that we need to get past that 90k point very, very quickly and keep growing because between 90k and 110k things aren't great for the business. You're putting out lots of money in VAT without actually making much more profits. Once we get past 110k towards 120k, then we're starting to make some good profits again. So general finger in the air, rule of thumb, these are the numbers we want to be aiming for. So if you're going to go past 90k, make sure we get to 100k, 120k very quickly. Final thing we're thinking about, there is a flat rate scheme which is worth knowing about. Talk to your accountant about it. It genuinely helps a lot of people. It's a lot easier to budget. So instead of tracking everything that you spend on VAT and bring in on VAT, HMRC just give you a percentage of your turnover to pay them. And beauty. I think I'm right in saying that's 13% plus you get a 1% discount for your first year. So actually instead of trying to add 20% to your prices, we're only actually adding 12% for that first year. But of course then you can't reclaim VAT on your purchases. But the simplicity means that it's a lot easier to figure out what you should be putting aside every month and every quarter for VAT. So have a little chat with your accountant, make sure that we are on the right scheme for you. The other thing I would make sure is that you've got a decent amount going out that you're spending on goods because if it's a very small amount, then you go onto a different fixed rate of 16.5%. So have a chat with your accountant, figure out what's the best rate and the best scheme for you in your situation. So three things to do after this episode. Check your rolling 12 month turnover today and set a reminder to do it every single bloody month. Second, if you think you might have already crossed or you think you're about to, call your accountant this week right now, don't put it off. Don't wait until next month. And if you are approaching that threshold, start those gradual price rises. Now, don't wait for the cliff edge. This doesn't have to be something that you're afraid of. It's a good sign. It's a sign that you're growing, thriving, and shining your way into the future. My darlings, if you'd like some help with all this, of course, reach out and let me know. My details in the description box below. I'd love to be helping you on your journey through my one-to-one coaching or through any of my programmes. If you want to talk through these numbers properly, of course then I would love to have a strategy call with you. And the booking link for that is in the description box. Let's get your next 12 months figured out, planned and your pricing strategy put in place there. That's exactly what these clarity calls are all about. Just a few short days until I'm coming all over the internet again with another dose of my wiser wisdom. And until then, take care.