In today’s episode we will take a deep dive into the tax considerations for anyone operating in the aesthetics industry. We will look at six main topics:

  1. Should you operate as a sole trader/partnership or as a company?
  2. Tax reliefs for clinic fit outs and refurbishments.
  3. Impact of different financing options.
  4. VAT cheat sheet and impact for your business.
  5. Importance of keeping your accounting books and records up to date.
  6. Tips and tricks for business expenses.

At the end of the episode you will have a better understanding of how tax can benefit your business. Enjoy

Hello and welcome to Taxable. Today we are taking a deep dive into the aesthetics industry, specifically looking at injectables. This industry has boomed as it’s now the norm for men and women to pop to a clinic for a touch up. The industry is dominated by owner managed businesses as those who are medically trained tend to set up their own practices. A variety of cosmetic and medical services are available and in my experience, those operating in this industry need to be aware of six key issues.

First of all, structure. Should you operate as a sole trader, partnership or as a company, they are subject to different rules and different taxes. Sole trader and partnerships are subject to income tax. Income tax rates tend to be higher, but the money is in your hands straight away. Companies suffer Corporation tax. A company is a separate legal identity. This means the money it earned is the company’s, not yours. If you want to get your hands on that money, it needs to be paid out to you via either a salary which is subject to income tax and national insurance dividends which is subject to dividend rates, or a loan which can potentially trigger something called a Section 4555 charge. If you’re not familiar with these terms or want to know more information about how to extract money from your company, listen to the episode called It’s My Money I’ll Spend if I want to. As we look at this in detail.

Now, in order to choose the best structure, you need to know what your long term goals are. If they are to grow the business, perhaps to have multiple clinics and your profits are likely to be significant. And by this I mean over £150,000 per annum, then a company is likely to be more tax efficient.

Please take note though, I prefer to profit, which is your income minus your expenditure, not your sales. If you operate as a one man band and your profits are very reasonable but are likely to be under £150,000 per annum, then a sole trader partnership structure may be the way forward for you. What you need to do is look at your projections and run through the potential tax scenarios.

Next you have the clinic but you need to get it ready. So we’ll look at clinic set out to operate a clinic, you need the right setup. This means buying lots of equipment which is expensive, so you need to make sure you maximize your available tax savings.

When calculating your tax bill, we will look at your income and your expenditure i.e., your profit and loss statement. When you buy equipment or do a fit out, the items are recorded on your balance sheet. In order to get tax relief in the year of purchase, the items need to qualify for something called Capital Allowances. If items do not qualify then you may get relief when you sell the property in the future. However, if you lease the property you may not get relief at all as you do not own it.

Capital allowances provide tax relief for certain purchases, but there are a lot of rules and case law in this area. The general rule is any equipment or items you can remove from a building are likely to qualify. This means anything affixed. For example, wooden floors, walls, fixed partitions do not qualify as they are part of the fabric of the building.

Sole traders and partnerships and companies can qualify for capital allowances. But remember, if you are a company, you’ve got one more year to qualify for something called the super deduction and this is great as it gives you an extra 30% of the cost you’ve spent as a tax deduction when we calculate your tax bill to avoid any unwanted or unexpected tax bills.

When you’ve spent so much on the fitout, you must be sure of your net figure. This means your costs minus your tax relief. What you should do is obtain a schedule of works from your contractor and pass it to your tax advisor to confirm which items will and will not be granted tax relief.

Next we’re going to look at funding. This is key as it needs to not only make commercial sense, but you do not want to shoot yourself in the foot by obtaining a schedule of works. Checking your tax reliefs to then find out that your method of funding has meant that it does not qualify.

So let’s look at how you can fund your clinic fit out or a refurbishment. First of all, cash reserves. This is great if you’ve got the cash to do it. The items are added to your balance sheet as you own them and qualifying items will receive tax relief through capital allowances.

Next you’ve got a loan. Again, you will be buying the equipment outright. You will receive tax relief through capital allowances and the interest payments are tax deductible. The downside is if you are a new business, you may not have the trading history in order to qualify for a loan or favorable interest rate.

Next you have something called hire purchase. This is treated the same as the loan option as you will own the equipment. After this, you have operating leases. You may not be able to purchase the fit out using this option as it is generally reserved for temporarily owning specific assets as you do not own the equipment. You do not get tax relief via capital allowances, but you do receive release of the monthly lease payments.

Finally, you’ve got a finance lease. These have their own set of rules usually used for larger fitouts if a loan cannot be obtained. This is quite an expensive option due to the associated interest. You do not receive tax relief through capital allowances, but you do get relief for the depreciation of the item and it’s usually depreciated over the life of the lease.

The takeaway from this is that it’s a complex area, so gather your options, talk to your adviser and run through your potential cash flow implications. Tax shouldn’t be the driver, but you want to make sure your option doesn’t have any unforeseen consequences.

Next, we move on to VAT. This is the most complicated tax and usually the most costly. Please remember this rule. Everything is subject to Standard rated that unless it falls into a category, it must fall squarely within that category to qualify for either 5%, 0% or be exempt. with exempt, no VAT is charged, but this has a direct knock on effect and it’s completely different to the zero rated VAT category. Although no VAT is charged with zero VAT, it is not the same as exempt.

For VAT, we’re going to split this into two parts. Vat on the services to your customers, and secondly, VAT on your purchases both affect your cash flow and your profit. So let’s first look at services. Why does it matter what that rate your services are? Well, firstly, if they’re Standard rated, you’re going to charge your service plus 20% to your customers who cannot reclaim the VAT. This means that it’s more expensive to the customer, but it doesn’t make any difference to you as the VAT is paid over to HMRC.

Secondly, the same with 5%. You have your service plus 5%, but your industry is not going to fall into this category. Thirdly, if the service is exempt from VAT, ie, no VAT is charged on the price to the customer. The price is lower, increasing your competitiveness.

And Fourthly, if the service is zero rated, this is a taxable supply even though no VAT is charged, 0% is a VAT rate, and now we have left the EU, the government could easily change that to 1% or 2%. It’s just at the moment it is at 0%.

I bet you’re thinking we want all of our services to be exempt from VAT, so we do not need to think about VAT returns. But hold on, there is a knock on effect if your service is exempt from VAT. This means that you cannot reclaim any VAT on purchases associated to that service, and you’ll also receive a restriction on reclaiming VAT on your other purchases. This means that your purchases are more expensive if you cannot fully reclaim the VAT charged on them. you need to look at each and every one of your income streams and determine the VAT rate to be applied.

Your services are not going to fall into 5% or 0%, so the rule of thumb for your industry is everything is either standard rated unless it specifically qualifies for an exemption. So let’s look at the exemptions which may be available. Medical Exemption this means a service must be provided for the health and wellbeing of an individual. Mental health does fall within this category, but it’s not clearcut so that instantly all of your services can fall into this.

You will need to have clear documentation on each client situation. For example, you may need a survey or a questionnaire with detailed notes on a client’s wellbeing, plus your comments on the patient’s mental health. This will be time consuming and it does not mean that HMRC will agree if inquiry is raised. The best thing to do is to get a VAT review by an expert. For example Botox. If it’s used for a cosmetic treatment, it’s standard rated. If it’s used for a medical purpose, for example, to relieve migraines, then it will be exempt.

If you think about this, it goes all back to the health and well being of an individual. The next exemption you may have is the land exemption. This is relevant if you are renting a room to other practitioners, this is likely to be exempt from VAT. There are ways to convert this to be standard rated, but you want to look at your overall situation to see whether you want this. And finally, dentistry is exempt from VAT.

What you want to do is to sum up all of your taxable income so that’s everything at 20% and see whether it exceeds £85k in a twelve month period. This is why it’s important to see whether you do or do not want to convert any rooms you rent out from exempt to standard rated.

If your taxable income is below £85,000, then you do not need to be registered for VAT and this will save you time as returns are not required. But do not forget the impact on your purchases. If you’re not registered you cannot reclaim the VAT on those.

Next, you want to look at purchases. Now these are split into services and goods and we’ll talk about goods first. When you buy a product or equipment, they include a VAT rate based on the product’s composition. It’s important to remember that the VAT treatment does not flow through to your use of the product. Just because you buy a product with, say, 0% VAT does not mean that you can then charge 0% VAT to your customer.

This is because you are purchasing a good, whereas you’re supplying a service to your customer and the good is consumed within your service. Other services may include things like your accountantfees, Internet charges, legal assistance, subscriptions and each of these have their own VAT rates.

If you paid VAT on these items. Ideally you want to reclaim it back from HMRC, otherwise it’s an additional cost to your business. Your ability to recover is based on your services, so let’s have a look at the options available. Firstly, if all of your services are charged with standard rated VAT, then you can claim 100% of the charged on your purchases, simple and easy Secondly, if all of your services are exempt from VAT, then you cannot reclaim any of that incurred on your purchases and this is what happens in the dentistry industry.

Thirdly, and as you’ve guessed, if you have a mix of standard rated and exempt sales, then you can only partially reclaim the VAT on your purchases. The technical term is that the company or your business is partly exempt. There are a lot of complex rules in this area and we can only touch upon it slightly today, but it’s best you have your accountant or your tax expert assist with the VAT return. You will need to understand the recoverability percentage of your business and this will constantly change so it will affect your cash flow.

Next we move on to your accounts. This is a lighter topic after all of the VAT talk, and it isn’t technically a tax topic, but it is vital. Your accounts need to be right. Things need to be recorded correctly and this is key for when you want to take out your profits or obtain investment. Make sure you have a good bookkeeper who is regularly looking at your accounts. You can either have someone in house or outsource it. This will not be cheap as it is a fulltime job. They will reconcile your bank statements, check your creditors and your debtors, send invoices process purchases, reconcile supplier statements, deal with your expenses, process your payroll, et ceteraSo there is lots to do.

There are good online systems such as Xero or QuickBooks and there are lots of other providers out there, but I tend to use Xero. What can you do with your records? Well, you can run a profit and loss account to see how the business is performing and this can be done on a daily, weekly or monthly basis so the information is in real time. Then you can check who owed you money and who you owe money to. This is helpful for cash flow. Remember, cash is not the same as profit and you need to know the difference.

The last topic we’ll look at is expenses. You need to make sure that you’re claiming all of your relevant business expenses. This means travel to conferences, teaching other practitioners. If you take out potential clients or business contacts, that’s known as entertaining your subsistence, that is your food and drink when you’re out and about for a work purpose. Any trips abroad. If the trips are work related, and I know that many of you fly out to different countries for conferences andtraining, you can reclaim all o those costs.

People usually miss this as the costs are paid for personally and they don’t know that they can ask the company for a refund. If you are a sole trader or partnership, you do not need to worry about this area. Expenses are paid in full as the cost of business related, it’s important to claim as otherwise you’re paying for work costs out of your taxable pay.

We’ve covered a lot and the key points to take away are first of all, focus on your long term goals to make sure your structure is aligned. Secondly, capital allowances are good but not everything qualifies. Thirdly, if you’re looking to do a fit out or a refurbishment or buy equipment, check with your tax adviser to see how much tax relief will apply. Fourthly, make sure you flag up how you are financing your purchases. Fifthly, VAT is hideously complex so get your advisor to do the heavy lifting. Next, real time information is key for you to monitor your business’s profitability and cash flow. And lastly, do not forget about your expenses. The little things add up.

If you are in the aesthetics industry or are thinking about venturing into it, then make sure you listen to my interview with Benji Dillon, the founder of Define Clinic. We discuss his journey, setting up his clinic, future plans and advice to his younger self. The audio is on your usual podcast platform, otherwise you can head over to the Tax Able with Tash YouTube channel. Please remember to click subscribe follow on socials and share this episode with your friends. Have a great week.

*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Please visit my disclaimers page. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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