Tax FAQs for authors
Created: April 2019
Q: What are the most common mistakes on tax returns?
The most common error is to show income after the deduction of agent’s commission and VAT. You should always show your gross income, before deductions, and make a separate claim for commission and VAT costs.
Apart from being the technically correct way of making your declaration, showing the income after deductions may lead to an enquiry by HMRC as it will also have received a declaration, either from publishers or literary agents, showing the full figure.
Other common omissions include outstanding student loans and child benefit, where either spouse or partner earns over £50,000 a year.
Q: Which tax issues cause the most confusion?
The income tax payments on account system can be a little tricky, particularly early on in an author’s career. 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 also confuses sometimes. 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. Only fluctuating profits can be averaged.
Q: What expenses do authors often forget to claim?
The most common omission, or understated claim, is the use of home as office. Where a room is furnished as an office, a claim for running costs can be made for 365 days a year. The expenses claimed can include rent or mortgage interest, council tax, buildings insurance, contents insurance, repairs and decorating, service charges, light heat and power.
Where a room is furnished as an office but not in constant use, light heat and power costs need to be restricted to actual usage.
Q: When I receive royalties via an agent, do I pay tax on the whole amount received from the publisher, or just what actually comes through once the agent’s commission is taken off?
The tax liability is on the net payment after deduction of the commission.
Q: When does HMRC want a detailed expenses claim?
A detailed expenses claim is only required if your turnover is above the VAT registration limit, currently £85,000 a year.
You should keep a full record so that any HMRC enquiries can be answered.
Q: Can I claim that most cultural expenditure, e.g. books, theatre tickets, Netflix subscription etc are business expenses as it all feeds into my work?
Authors can generally claim that most cultural expenditure, eg books and theatre tickets, is business related, but it is generally advisable to exclude a percentage to cover any private element.
Q: Should I keep all receipts and file these by tax year?
We recommend keeping all receipts, business and domestic, together with annotated bank statements and credit card statements, and any related records, for a period of six years from the end of each tax year. Keeping non-business items helps to demonstrate to HMRC that private expenses have been excluded from any claims. It is helpful to file tax year by tax year.
Q: How can I avoid paying tax in foreign countries?
The UK has double taxation agreements with most countries. It is 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 tax action to organise this, HMRC can deny the relief.
Claims should always be made under the applicable double taxation agreement. Claim forms have to be certified by HMRC; standard forms are available.
Q: Will I still be liable to UK tax on royalties if I go and live abroad?
No, there is an exemption that covers any bona fide author carrying on the profession outside the UK. This is regardless of whether there is a double taxation agreement in place.
Q: Under what circumstances might averaging be useful? Can I only claim retrospectively, ie after the second of the two years I’m averaging between?
Averaging can only be claimed where profits fluctuate. Once one year’s profit is less than 75% of the profit of the adjoining year, a claim can be made.
The claim can only be made on the tax return relating to the second of the two years. It takes the form of an adjustment, calculated by reference to the profits of both years, but the tax for the earlier year is unaffected.
Q: Is it better to have a separate business account?
It is quite useful to have a separate account for work because all authorship income is then recorded in one place, together with expenses. However, there will always be expenses such as home costs, telephone costs, car costs etc that will not be entirely for business and may well be paid through a personal bank account.
Q: If I am earning very little – just a few bits from PLR and ALCS and the odd royalty – do I still need to submit a tax return, even if it’s just £100 or so?
As long as you maintain that you continue to be a professional author, HMRC will require a tax return. If you say you have ceased, HMRC might discontinue the tax return process but you will still need to notify them of the income from time to time so that tax can be collected.
Q: How much do I need to be earning, in practice, before I should start thinking about charging VAT?
The compulsory registration limit is £85,000 UK earnings in any consecutive 12 months. Once you have exceeded this limit, you have 30 days to register. There is a penalty for registering late.
It’s possible to register for VAT at any time and it will always save you money to do so. The submission of quarterly returns is quite simple and done online.
Q: What happens if both people in the household are self-employed and working at home? Can we both claim a fair proportion of the total household costs? What if one person has paid the phone bill and the other the heating?
Claims are based on the expenses incurred; it doesn’t matter which member of the household pays them. If one room is used as an office, this can be claimed, but only once. Some people claim half each, while others have a room each. The appropriate proportion of phone and heating costs can be claimed by both as individual professionals.
Q: How do capital allowances work?
Currently, any item bought during a tax year can be claimed in full under the heading of “annual investment allowance”. The rules do change from time to time, though.
Writing down allowance applies to items bought or introduced into the business in an earlier tax year, and not wholly claimed at the time. In these circumstances a claim is made for 18% of the reducing balance of this expenditure. The balance can be written off once it reaches £1,000. It is not necessary to claim the full available allowance if it is not beneficial to do so. Instead the balance can be carried forward to be claimed in later years.
Q: I know a number of authors who operate through limited companies: would this be beneficial to me?
As the corporation tax rate for companies is 19%, compared with combined income tax and national insurance rates of up to 47% for individuals, many writers do choose to operate through limited companies. Care is needed, though, and professional advice should be sought. Authors should not assign copyrights into limited companies without taking professional advice because there can be substantial tax disadvantages if the matter is handled incorrectly.