Should hairdressers have lower VAT?

Barbershops and some small repair services like shoemakers had a lower VAT (Value added tax) during the time 1.1.2007-31.12.2011 (Murtomäki, Otto. Yrittäjän arvonlisäverokirja 2010) . Their VAT was only 8-9 percent then, when normal VAT for services was 22-23 percent. 1.1.2012 hairdressers VAT was raised back to 23 percent and 1.1.2013 to 24 percent. Why?

Reducing VAT was part of a trial in EU area. The idea was to test if it’s possible to get more jobs and customers to business sector by lowering value added tax.

Interest group of Finnish hairdressers,  Suomen Hiusyrittäjät ry, is worried about results of rising VAT back to the same level than other services. In YLE News article 24.3.2013  they say that people are not visiting hairdresser as often as they used to, which causes problems to small hairdressing saloons and some hairdressers have been  forced to start their own business instead of having an employment relationship.

On the other hand, Tuomas Kosonen in his publication and research to VATT (Government Institute for Economic Research) “What was actually cut in the barbers’ VAT cut?”  in 2010 says that aimed goals were not reached. Barbershops cut their prices only 7,2 percent when the benefit businesses got from lowering  VAT was 11,5 percent. Better employment was not achieved either.

In my opinion, it’s easy to believe that reduction of tax didn’t show in consumer prices as much as it should, for example when VAT of groceries was reduced in 2009 prices of groceries got even cheaper (-5,6 %) than what was the advantage to companies (-4,3 %) and consumers and whole business area was very satisfied. It’s also difficult to see why only hairdressers would be entitled to lower VAT, while for example beauticians have had normal value added tax all the time. But still, VAT rising from 8 percent to 24 percent in few years is a huge strain for small companies. Especially many new firms founded during lower VAT were not prepared well enough for the end of this trial.

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7 Responses to Should hairdressers have lower VAT?

  1. marjasusannafalck says:

    Interesting text. I would have imagined that it would have had more impact on the prices. If I compare prices charged for cut and color the price is still the same, after the tax changed back to 23% first and then to 24% Also I think that many hairdressers who started during the lower VAT didn’t think that it will rise back and they weren’t prepared for it.

  2. maariterving says:

    This is very interesting subject. I can’t see that there would be big differences between hairdressers and beauticians. The field of business is the same, isn’t it? In my opinion, the value added tax should be the same in the whole area. And it is true that the significant rises in VAT cause big problems to small companies. If there is need to raise VAT, the best way could be a gradual increase, and also anticipatory informing should be truism.

  3. maurihiekkamies says:

    The original idea was good. Try to get more jobs and customers to those business sectors. But the lowering of prices is always difficult. Business owners will begin immediately to think about the chance to earn money. So then greed comes the picture. I have personal experience of tax cuts. Fact is that companies use coming tax cuts to their advantage. Prices are raised in silence before the tax cuts so that in public companies can commit to the fact that the tax cuts also appear in the prices. That is how it goes. My advice is that same tax for all.

  4. jhaikio says:

    Yes, like you say VAT don`t have a matter for pricing, “Barbershops cut their prices only 7,2 percent when the benefit businesses got from lowering VAT was 11,5 percent.” VAT return anyway to business owner. Barber jobs VAT is only small part in pricing. Pricing consist of rent, material, insurance etc. I agree with maariterving and Maurihiekkamies, same tax for all. VAT don ruin barbershop business, if they get small expenses then they can keep prices low and people use more barbershop service. Bigger problem is undeclared work what people doing, its reason why we must pay high tax.

  5. julialipaeva says:

    An interesting text. If I were an entrepreneur, I accepted a lower rate of tax. As a consumer, I go to the hairdresser and pay the price for good service that is requested. Let the price of what it is, I want to cut my hair all in my head, not on the left side of the van. On the other hand, taxes are collected, and built schools, roads, hospitals, meaning that all people are using the benefits.

  6. olgator says:

    I completely agree with Maarit Erving. The same business area – the same rate of VAT. So, on my opinion hairdressers should pay high VAT as cosmeticians do. On the other hand – every hairdressers client wants to get the high quality of service on the low price. So we can see that for the client it’s better, when the rate of VAT is lower, because the price of service depends on VAT as usual.

    Best regards,

    Olga

  7. harza123 says:

    I think it is ok for barbers and hairdressers to improve their margins also a bit when there were that lower VAT experimentation. So I got cheaper haircut and barber earned a bit better, win-win. Taxes are often too high in Finland, then people save by not using services so often. In Japan, that is considered quite expensive country, men’s haircut is about 10 $. So in Finland it is some 25-30 €, huge difference!. I support lower taxes to these service industries, like barbers and hairdressers, it would increase employment opportunities and Finns would use more these services. when they are cheaper. But taxman and politicians seems to think differently, they prefer higher taxes.

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