How to survive a tax inspection at your salon or barbershop

From checks on your tax, VAT and record-keeping to the possibility of a dawn raid by HMRC officials, you’ll need to understand the role of HMRC and follow our best practice tips to help avoid penalties and in-depth investigations.

This blog post covers:

• Best practice
• Tax compliance check
• What happens after a tax compliance check?
• VAT inspections
• What happens after a VAT inspection?
• Record keeping checks
• HMRC’s legal rights
• Dealing with a ‘dawn raid’
• Checklist

Best practice when dealing with HMRC

There are a number of steps you can take to make your dealings with HMRC as straightforward as possible. Always be prepared. Make sure there are at least one or two designated people in your salon or barbershop who are well-briefed and capable of dealing with HMRC – from answering a phone call to dealing with an investigation.

In addition:

• Make sure everything related to your business finances, including salaries and chair/room renting agreements, is properly recorded and documented.
• Ensure your business records, tax returns and paperwork are in order and you know where to find them.
• Make regular backups of all your electronic records.
• Use an accountant if you are not 100% confident when dealing with tax and VAT issues.

Find out more about how to choose an accountant.

This guide will help you understand the basics of financial management for your business including tax, VAT, accounting and record keeping. It’s available to NHBF Members only. Not yet a Member? Join today.

If HMRC contact you to arrange a phone call or investigation, always take immediate professional advice, for example, from your accountant and solicitor. 

Tax compliance check

HMRC can check to see if your salon or barbershop business is paying the right amount of tax.

They will write or phone you (or your accountant if you have one) to explain what they want to check. This could include:

• The taxes you pay.
• Your business accounts and calculations.
• Your Self Assessment tax return if you are classed as self-employed (for example a chair or room renter)
• The tax return for your business.
• Your PAYE records and returns if you employ staff.

Read our blog post about the National Minimum Wage for salon and barbershop owners.

HMRC may want to visit your salon or barbershop, or your accountant’s office. If they visit your salon or barbershop, you can have your accountant or a legal advisor with you.

You may have to pay a penalty if you don’t send information requested by HMRC or if you refuse a visit.

What happens after the tax compliance check?

HMRC will write to tell you the results of their check.

• You will get a refund if you have paid too much tax.
• You will have to repay anything you owe within 30 days. Interest from the date the tax was originally due will usually be charged.

You may also have to pay a penalty if you have not paid enough tax. This will depend on factors such as why you underpaid and if you told HMRC as soon as you could.

You may be able to appeal if you disagree with the result of the tax compliance check. This will be explained in the letter you receive from HMRC following the check.

VAT inspections at your salon or barbershop

HMRC will usually contact you to arrange a visit if they want to check your VAT records, including how much you pay and reclaim. You will usually get seven days’ notice.

You will be told what information they need to see and how long the inspection will take.

Bear in mind that HMRC may also:

• Visit without making an appointment.
• Phone you about your VAT.

This guide will help you understand the basics of financial management for your business including tax, VAT, accounting and record keeping. It’s available to Members only.

What happens after the VAT inspection?

HMRC will write to you explaining:

• If there are any steps you must take to improve your VAT record keeping.
• Any corrections you must make to your VAT account.
• If you’re overpaying or underpaying VAT.
• Any penalty you have to pay.

You can appeal within 30 days. This will be explained in the letter you receive from HMRC following the VAT inspection.

Record keeping checks

Your salon or barbershop must keep proper records to ensure your tax returns are filled in correctly and that you pay the right amount of tax at the right time.

HMRC may decide to check your business records to ensure you are keeping them correctly. They will send you a letter and ask you to phone them. This phone call should take between ten and 15 minutes.

During the call, you will be told one of the following:

• Everything seems OK and no further action is needed. This will be confirmed in writing.
• You need some additional support. You will be told where to find help.
• Your records may be inadequate and you need a face-to-face meeting to sort things out. They will arrange this with you.

If your records are found to be inadequate at the meeting, you will be given the chance to put things right. HMRC will arrange a follow-up visit, usually within three months. If you’ve put things right you will not have to pay a penalty.

If your records are still inadequate, you may have to pay a penalty of £500 (or £250 for businesses in their first year).

HMRC's legal rights

The law says HMRC can:

• Enter and search your salon or barbershop.
• Require documents to be handed over (except ‘privileged’ documents, for example, confidential communication between you and your solicitor).
• Seize items such as computers.
• Arrest people.

However, to exercise these legal rights, HMRC will normally need to apply for a warrant.

Checklist

• Follow best practice to help avoid potential penalties and in-depth HMRC investigations.
• HMRC may carry out a tax compliance check, VAT inspection or record keeping check.
• The HMRC has certain legal rights, including the right to enter and search your salon or barbershop – but they will normally need a warrant.
• Stay calm if the HMRC carry out a dawn raid and follow the instructions of your professional advisers.