National Hair & Beauty Federation calls for urgent VAT reform and targeted sector support

Ahead of the Spring Budget on 6 March, the National Hair & Beauty Federation (NHBF) has written to the Chancellor to urge him to provide vital targeted support to the sector:

• Urgent VAT reform including either reducing the rate of VAT, raising the threshold or introducing a smoothing mechanism or tiered rates around the VAT threshold. A recent independent paper published by the NHBF ‘Avoiding the Cliff Edge’ shows businesses ‘bunching’ behind the threshold and modelled different options for tiered rates to incentivise growth. The paper also showcased international case studies such as the Netherlands where VAT was lowered to 6% in the early 2000s for labour-intensive services, which led to the creation of 4000 sector jobs.
• More support to employers such as offering targeted apprenticeship incentives to small and micro employers of up to £3,000 per employee, particularly to help fund the gap between the apprentice wage and the national minimum wage for older apprentices aged 19+. This can be achieved through a more effective redistribution of funds from the apprenticeship levy.
• A crack down on tax evading businesses to give legitimate businesses a chance at recovery and help create more of a level playing field.

The recovery of the sector has been slow and steady over the past year. Sector businesses have survived the turbulent years of the pandemic, the ‘cost of doing business’ crisis and extortionate energy bills. However, with wages rising again in April 2024 and an ongoing skills crisis in the sector, the future of the sector is at risk.

According to the NHBF latest quarterly State of the Industry surveys in January, recruitment intentions for both staff and apprentices have dipped further.

Caroline Larissey, NHBF Chief Executive says,

‘Ahead of the Spring Budget, we are calling on the government for further targeted sector support in the form of VAT reform (either reducing the rate, raising the threshold or tiered rates). The recent discussion paper we published, Avoiding the cliff edge, is all about giving the government options for reform in the current climate, including affordable solutions.

With the dip in numbers of businesses planning to take on staff and apprentices we urge the government to find ways to further support employers, building on the 75% business rates discount which was hugely welcome. With targeted support we are confident that our sector will continue make a vital contribution to high streets and community wealth and wellbeing’.

Avoiding the cliff edge

The independent paper published in January sets out options for a smoothing mechanism or tiered rates around the VAT threshold.

The current VAT rate of 20% leads to a cliff edge for businesses as they reach this threshold, leading to ‘bunching’ where businesses forgo further growth to avoid the abrupt change to the VAT rate. This also leads to non-reporting as small businesses seek to stay below the £85,000 threshold, potentially reducing overall economic activity, which in turn leads to reduced tax revenues. 

The paper also includes case studies from Finland and the Netherlands that show the positive impact of lower VAT rates. The Netherlands lowered VAT to 6% in the early 2000s for labour-intensive services, which led to the creation of 4000 sector jobs.

The report identifies smoothing mechanisms to change the current VAT system to benefit businesses, encouraging growth and expansion and potentially increasing tax revenues, namely:

• Options at or above the threshold, meaning reduced VAT revenue for the government. The report models two options where graduated VAT could start at £85,000. With a moderately graduated option, HM Treasury would see a loss of £2.5 billion in VAT revenue, counteracted by an additional £2 billion in increased compliance.

• Five options starting below the current threshold meaning the government would see no loss in VAT revenue, from ‘least graduated’ to ‘most graduated’ where VAT, starting from a lower rate would increase in steps towards the current standard rate of 20%.

The paper estimates that an additional £25.2 billion in turnover would be declared returning an additional £2.2 billion in VAT revenue to HM Treasury with at least £33m of this coming from the hair and beauty sector. Whilst the paper estimates an administrative cost for businesses this would be a small share (2.5%) of average sector labour costs.