Vintage hairdressers chair
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‘Contrariwise, if it was so, it might be; and if it were so, it would be; but as it isn’t, it ain’t. That’s logic.’ (Lewis Carroll, ‘Through the Looking Glass’)

Australia recently got its first ‘First Bloke’ when Julia Gillard became the new Prime Minister after ousting the incumbent Kevin Rudd. An interesting factoid about the new PM is that she apparently met her own bloke in the hairdressers where he worked. Which brings to mind the long-running (sometimes seemingly never-ending) dispute between HMRC and hairdressers in relation to the tax liability of payments made by stylists to salon owners.

Many stylists are self-employed and pay the owners of hairdressing salons for the facilities they use. In the past, this arrangement has been described as ‘renting a chair’, in an attempt to make the payment exempt from VAT (if the stylist is merely paying for a licence to occupy the chair, the salon owner avoids having to account for VAT on the amounts received). In reality, the stylists receive many other benefits for their payments – the services of a receptionist employed by the salon owner, towels and linen, shampoos and other materials (not to mention access to priceless gossip and back copies of Hello magazine).

There are at least 28 reported tax cases on variations of this basic scenario. The lesson that emerges is that it isn’t possible to change the reality of a situation, for example, by producing a contract between stylist and salon owner that says that the stylist is only paying to rent a chair, when in fact he or she is using all the facilities of the salon in exchange for the amount paid.

I’ve recently come up against the frustrations of what might be termed a reverse rent-a-chair experience. A friend of mine is starting his own business, owning and managing a gym. He wanted to set things up so that investors could claim tax relief for their investment under the Enterprise Investment Scheme and asked me to help by writing to HMRC for confirmation that the relief would be available. The new gym won’t be open to the public, only to personal trainers who will pay a fee to use the gym facilities and bring their own clients there for training sessions.

As with many reliefs, EIS is hedged around with conditions, and those seeking to claim it are viewed with suspicion by HMRC on the grounds that they’re probably ‘up to something’. One of the conditions is that there must be a ‘qualifying trade’. By what may be regarded by some as an endearing quirk of the UK tax system (others might simply be irked by it), generating income from land is not a trade. Generating income from land means exploiting an estate, interest or right in or over land as a source of rent or other receipts.

In my carefully worded letter, I clearly explained (or so I thought) that the personal trainers will pay a fee to use the facilities of the gym – receptionist, equipment, towels – and will not have any lease, licence or other exclusive right. In response, I receive this stunning reply: EIS relief would not available because, as the personal trainers were paying rent, there was no qualifying trade. Nevertheless VAT was due as for VAT purposes the fee was not rent but was akin to the fees paid by the hair stylists under the rent-a-chair scheme! Be assured, I’m not letting this drop.

As the saying goes, ‘when the going gets tough, the tough go to the hairdressers’. Julia Gillard hasn’t got far to go if things get tough for her, and I’ve already been once this week.


*** UPDATE – August 2012 ***

Whoopee, peeps. Finally got HMRC to agree EIS treatment for the gym on 9th August 2012, a mere 27 months after the application first went in.

Tax lawyer specialising in business tax, SDLT and VAT

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