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Authors’ tax trap – incorporations that go wrong

Created: December 2018

Our Authors & Journalists team advises writers on whether they would benefit by operating through a limited company. Care is needed as there can be complications and circumstances vary from one author to another.

Every now and then we meet an author who has been badly advised and we need to engage in damage limitation to help them. Pitfalls to watch out for:

  1. For a company to be able to receive royalties and advances, it must be entitled to do so. Authors can’t sign contracts in their own name and simply put earnings into the company. HMRC regards this as “nicknaming” the income as belonging to the company. The earnings remain taxable in the hands of the author.
  2. If an author writes a book and then assigns the copyright into a company, this constitutes a disposal of intellectual property and they have to pay income tax on the open market value. This liability arises on any assignment, licensing or sale of the copyright once this has been created. This market value may have to be negotiated with HMRC and has to be self-assessed. In this scenario the author has to pay income tax on a substantial proportion of the book advances receivable, the company pays corporation tax on similar figures and the author has to pay income tax or dividend tax on amounts withdrawn from the company. A very expensive situation.
  3. Copyright assignments must be done in writing. Where there is a nil consideration, a Deed must be prepared.
  4. If an author has a multiple book contract and the copyright is assigned, it’s likely that any income tax liability will only apply to book one, as usually this is the only one to have been completed at that stage.
  5. Where a book deal is entered into and the level of advances has been agreed, or is later agreed, the figures involved have to be used as a basis for the open market valuation. Allowances can be made if there are likely to be costs incurred before publication.
  6. Faced with possible income tax liabilities on the assignment, it is often better to sell the copyright to the company at this market value, as this will enable it to obtain corporation tax relief on the purchase price. This is done by amortising the cost over time.
  7. The ideal scenario is for the author to form a company first, then write the book on behalf of the company. This means no assignment will be needed, just some simple paperwork. It follows that, once an author has a company in place, all future book earnings can be channelled through it.
  8. Self-employed authors are able to claim “authors’ averaging” which helps to reduce tax liabilities where earnings fluctuate from one year to another. This can frequently reduce tax liabilities to a level similar to that achievable by the use of limited companies, without the complications.
  9. Each case has to be looked at on its merits. In some cases, companies can be used to accumulate profits for distribution in later years.  Sometimes, partners, spouses or other family members can become shareholders and receive dividends which may achieve tax savings. In short, it is important to obtain professional advice.

For more information contact Barry Kernon on:

T: +44(0)20 7874 7875

E: bkernon@hwfisher.co.uk