7th January 2019A miscellany of hints, tips and wrinkles for writers based in the UK
- All authors now need to register for self-assessment in order to claim credit for pension and benefit purposes, and pay the appropriate amount of Class 2 national insurance contributions. In other words, writers need to opt in. Those with earnings (profits) under £6,205 a year can apply for exemption, although this means they will not build up a credit for state pension purposes. You can register at gov.uk
- Under the self-assessment system, record-keeping is extremely important. In an enquiry, HMRC will often try to cast doubt on the accuracy of the records, enabling them to argue that expenses should be disallowed. So it’s important to record all items of income and expenditure, and to keep as many receipts as possible, together with other supporting evidence such as bank and credit card statements. It’s helpful to annotate these statements to clarify the nature of any given item where there is no supporting paperwork. It’s also a good idea to keep a diary as a non-financial record of your activities which can support claims for expenses such as travelling, taxis etc. You may find the following guidance in key areas useful:
- Car and phone expenses. Keep a log or diary note for a sample period of, say, three months, and base the annual claim on this percentage. Alternatively, for car costs, simply keep a record of business miles and apply the 45p HMRC ‘approved rate.’ Review this perhaps once in each tax year or, if not, as regularly as possible.
- Use of home as office. Keep all receipts for home costs. If you work from home, you can make a claim for a proportion of home costs, whether or not a room is set aside for business use. The claim will be for a proportion of home costs, such as rent or mortgage interest, council tax, electricity, gas, other fuels, buildings insurance, contents insurance, service charges, ground rent, repairs and decorating, depending upon the type of property. Where a room is furnished as an office, a claim for running costs can be made for 365 days a year.
If a separate room is not furnished as an office, you may have to restrict the claim to the number of hours spent working at home.
It’s advisable to ensure that any office or study is used primarily, but not exclusively, for business purposes if the property is owned as this will avoid any capital gains tax liability arising on the sale of the property.
3. Payments to spouses/partners for assistance. The fee or salary must actually be paid from the business, and evidence of this should be retained. Annotating bank statements would probably represent an acceptable record.
4. Travelling. It’s not a statutory requirement to have a receipt for every expense, although it helps. Keep a diary note of amounts spent on taxis and public transport. Taxi drivers will give receipts but these do get lost, overlooked or forgotten, and sometimes there just isn’t time wait while one is written out. A contemporaneous note is quite acceptable.
- Writers commonly make the mistake of showing income after deduction of agent’s commission and VAT. Gross income, before deductions, should always be shown, and a separate claim made for the commission and VAT costs.
Apart from being the technically correct way of making the declaration, showing income after deductions may lead to an enquiry by HMRC as it will have received a declaration, either from publishers or literary agents, showing the full figure.
- The income tax payments on account system sometimes causes confusion. Tax on the first year’s income is payable on 31 January following the year of assessment, but it often comes as a surprise that a payment of another 50% is due on the same day, on account of the then current year. A further 50% payment is due on 31 July following the year of assessment. Applications can be made to reduce payments on account where it is known that income is falling.
- Authors’ averaging of profits can also baffle. Averaging does not spread tax liabilities forwards or backwards, it is simply a calculation designed to reduce the tax payable in the second of two adjoining tax years, the adjustment being calculated by reference to the average of the profits for the two years.
- The UK has double taxation agreements with most countries. It’s the author’s responsibility to minimise the tax paid in the other country. If a tax can be avoided or reduced, and the author does not take action to organise this, HMRC can deny the relief.
Claims should always be made under the applicable double taxation agreement and claim forms must be certified by HMRC.
Authors living outside the UK are not liable to UK tax on royalties paid by UK publishers. This is an exemption that covers any bona fide author carrying on the profession outside the UK and applies where there is no double taxation agreement in place.
- Writers earning less than £1,000 in any given tax year have no liability to tax. If their income exceeds £1,000, they are able to deduct £1,000 as a notional expense allowance or to claim the actual expenses, if higher. This is particularly useful for retired or semi-retired writers who are simply in receipt of income from ALCS, PLR and/or occasional royalties, lecture fees etc.
- Where authors channel income through limited companies, it is often possible to effect tax savings. National insurance liabilities can be reduced and profits can be distributed to family co-shareholders in the form of dividends. The rate of corporation tax is currently 19% which is much lower than income tax rates, and profits can be accumulated within a type of “money box”. Companies are used to spread income over a number of tax years.
- Authors using limited companies to channel their income must ensure that the company is entitled to receive the income in its own right. To do this, the publishing agreement must be between the company and the publisher. If the contract is in the author’s own name and the income goes through the limited company, the resultant accounts could be misleading and open to attack by HMRC. If a copyright is assigned in writing to a limited company, the publisher should be notified so that the payment can go into the correct account. It is likely that this notification would be done at the same time as the VAT position is dealt with.
At the same time, care is needed when assigning copyright or novating an authorship contract into the name of a company because this transaction is deemed to be done at market value where the copyright has been created since 31 March 2002.
This is a complicated area and professional advice should be sought in order to avoid incurring unnecessary tax liabilities.
VAT top tips
- It isn’t compulsory to register for VAT until your turnover (i.e. total self-employed income from UK sources) exceeds £85,000 a year. You can, however, register voluntarily, no matter what your turnover is. When registered for VAT you can reclaim the VAT on your expenses.
- Beware of the implications of ‘Scale Charges’ if you reclaim VAT on petrol. Since the VAT authorities are not renowned for their leniency or sympathy and operate a harsh regime, it is wise to consult an accountant to review the benefits and pitfalls of VAT registration first, and the accounting system to be used.
- VAT is chargeable on automatic digital sales (such as eBooks) made to EU residents. Details can be found at https://www.gov.uk/vat-on-digital-services-in-the-eu
- Payments from ALCS are VATable but Public Lending Right payments are outside the scope of VAT. (Incidentally every book has to be registered separately for PLR.)
- It’s important to notify your publishers of VAT registration as they should be adding VAT to royalty payments. Most publishers operate a self-billing system, so once they have your VAT number, they can produce documentation that saves you submitting a VAT invoice.