A significant shift among British hairdressers to register as self-employed is creating the biggest threat to the industry Darren Messias has seen in his more than three-decade career.
The stylist and managing director of a hair franchise in the East Midlands says his business is being undercut by “rent-a-chair” salons that allow hairdressers to use their space and some equipment but remain independent for tax purposes. As they are not employed by the salon, businesses pay less VAT and employer national insurance.
“You’ve got two salons side by side, with the same number of people, the same products and services,” Messias says. “One is an employed model like we are — so we are paying VAT, national insurance contributions.
“Next door is ‘disguised employment’ or ‘rent-a-chair’. The business owner has found a way not to pay VAT and that doesn’t feel like a level playing field — they can massively undercut us on price — and that’s making business exceptionally tough for us.”
Rising labour costs, including increases in the national minimum wage and employer NI, are creating a particular squeeze for salon owners. Salons are hit three times harder by employment taxes and VAT than an equivalent independent high street retail business, according to research from the British Hair Consortium, which represents the industry, and CBI Economics. This is because they are so labour-intensive — about 60 per cent of costs are wages — and they cannot reclaim sales taxes in the way retail or hospitality businesses can.
Many hairdressers are leaving the profession as a result, or making their staff go self-employed to reduce their tax bill. This is creating “distorted competition between VAT-registered and non-registered businesses”, according to the BHC and CBI Economics.
Their report estimated the discrepancies, along with dwindling employment, have reduced VAT receipts by £2.4bn since 2009. It warned that employment in the hairdressing industry could fall by 93 per cent by 2030, potentially creating a sector devoid of the rights that come with being an employee.
Like Messias, Donna Finn, who started as an apprentice in 1974 and now owns the Fe’Male Ego hair and beauty salon in Hull, is finding it harder to get through each month, as costs rise and rivals opt for the self-employed model.
“Some of them, it’s done in an underhand way,” says Finn, who has six employees and one trainee. “I feel as though I’ve been kicked in the teeth because I’m legal.”
Salon owners also warn apprenticeships will become harder to offer and could eventually become obsolete as the cost of training becomes untenable for many. “If you’re self-employed you’re not going to share your wages to teach hairdressing,” adds Finn.
Messias, whose 20 KH Hair franchises took on about 50 apprentices a year before the pandemic, last year recruited only 21. Although he receives some government funding for training, he predicts the numbers will continue to drop as salon owners can no longer afford the additional costs — despite strong interest from a young cohort wanting to take up the profession.
The BHC maintains that self-employment is a “perfectly legitimate employment status”.
But the industry wants reforms including a split-rate VAT model, whereby labour-based services are taxed at 10 per cent, compared with the current 20 per cent, to recognise its cost structure. It has also suggested lowering the level of revenue at which a business starts paying VAT, currently £90,000, as a way to combat disguised employment.
“Without some sort of levelling of the playing field you are going to see a complete decimation of employment,” warns Toby Dicker, co-founder of the BHC.
Last year, 63 per cent of salon workers were self-employed and this is projected to rise to 76 per cent by 2030, according to the BHC report. Employment in the sector has decreased by 69,400 workers in a decade.
For some hairdressers, changes to employers’ NI introduced in the October Budget were the final straw.
Katya Milavic-Davies, managing director of Myla and Davis, which has four salons in south London, says: “Hairdressers cannot cope with the most recent changes because of the [high] labour costs.”
This month, Myla and Davis decided to close down what was supposed to be an academy space. “I think the Budget really kind of put an end to that. I’ve got to say this is the first time in 15 years that we’ve downsized,” says Milavic-Davies.
“There is such a strong, widespread precedent internationally for VAT being lower for service industries . . . it just seems to me like this is not something the government is prepared to engage on.”
A Treasury spokesperson responds: “We’re levelling the playing field for high street businesses, including hairdressers, by permanently cutting business rates and removing the £110,000 cap for over 280,000 retail, hospitality and leisure business properties, while also capping corporation tax for the duration of parliament.”
