It is often the case that those who have creative flair possess no interest in more mundane things like figures let alone tax! Unfortunately for those people, especially if and when they become successful, they need to pay tax on their profits and so they either require some understanding of accounting and tax matters or they must be prepared to pay someone else to deal with it for them.
We work with an increasing number of authors and hope that this blog will help people like them to grasp the basics of what is required.
The bad news is that if you earn £1,000 or more from writing you have to register for self assessment, complete an annual Self Assessment Tax Return and potentially pay tax on your writing profits. The likelihood is that your writing income will supplement other forms of income such as an employment and therefore even if your writing income is modest your affairs can quite quickly become complex.
Most writers when they write their first novel do so as an individual and are therefore assessable to tax personally on the profits they generate. To calculate the profits you earn you need to prepare a set of accounts using the usual accounting rules. Therefore tax deductible expenses can be set against income to work out the net profit that will be liable to income tax and national insurance. In particular pre-trading expenditure should be considered. That applies to expenditure incurred no more than seven years before the commencement of trade. As written works can take several years to complete a good discipline to adopt is to keep invoices for all relevant expenditure and ideally at least at the beginning a spreadsheet listing qualifying expenses, such as household bills if you work from home. All pre-trading expenditure is treated as if it were incurred on the first day of trade.
Other expenses you might be able to claim are:
- Travelling to do research, meet your agent or publisher etc..
- Books bought to help with research and ideas for your creative work
- Telephone and broadband costs
- Stationery, such as notebooks and pens
- Equipment used, such as computers, laptops, desks and chairs
- Training courses, but only those which maintain or update existing skills
In addition, if you have anyone who helps with your business – they might help proof read your work, organise your diary or even do your bookkeeping – you can pay them a salary from your business. This could be really useful if your profits push you into higher rates of tax and they are a basic rate taxpayer or have no income in their own right.
Like other self-employed people authors and artists could benefit from using accounting software, such as Xero, to record their income and expenses and keep an electronic record of their receipts.
Because of the fluctuating nature of income from creative works a form of averaging relief is available to smooth the profits of authors and artists. The averaging rules allow creators of literary or artistic works to add together two consecutive years’ profits and average them for tax purposes.
You can make an averaging claim if your profits come from disposing of works or from royalties for allowing people to reproduce your works. That includes:
- An author whose income comes from the sale of written work, even if a small part of your income comes from personal appearances
- A computer software writer whose income comes from royalties for reproducing the code you write, which is protected by copyright
You cannot claim if your profits comes from services you provide. That includes:
- An architect whose income comes mainly from their services – even if some of their income comes from selling material protected by copyright
- A computer programmer whose income comes from the service of writing scripts or programs, not the actual works
The claim is only available to sole traders and members of partnerships, so would not be available to those who trade through a limited company.
In order to claim the relief one of the tax year’s profits must be less than 75% of the profits of the other year, or the profits of one year must be nil.
The benefit of the claim is to divert profits from a year when you are paying tax at the higher rate or additional rate of income tax to a year when you have unused basic rate band, thereby reducing your overall tax liability for the two years combined. Once a year has been averaged that adjusted profit figure is available to average with the following year’s profit if the numbers allow.
There are two principal types of copyright:
Artistic – covering visual works (including dramatic works)
Literary – covering written works, including music. This category also covers computer software, as the code is written work, albeit one that is rarely published as such.
A copyright work must be original and be capable of being produced in physical form.
There is no registration requirement for copyrights in the UK. The copyright protection covers the life of the author plus 70 years.
Copyright gives the creator the right to control use of the copyright material in a variety of ways: making copies, issuing copies to the public, performing in public, broadcasting, adaptation and use online. Copyright also gives the creator the right to object to distortion or mutilation of the copyright material.
From a tax perspective copyright is usually exploited by licence, with the licensor being paid royalties which are taxable as income. Any proceeds – whether a single payment or a series of royalties – relating to copyright are generally taxable in the UK as income of the licensor where the licensor carries on a trade or profession, even where the copyright is assigned outright to a purchaser. Therefore if a sole trader chose to transfer their copyright into their own limited company they would pay income tax on the market value of that copyright at the time it was assigned.
Some transactions might be treated as capital in nature – such as if you sold the film rights to a novel, which would be treated as a part disposal of your intellectual property. The resultant profit on such a sale would be subject to capital gains tax legislation, which is currently at far lower rates than most income tax rates.
Registering for VAT
Whilst most writer’s income will be below the VAT threshold (currently £85,000) there are two circumstances where VAT needs to be considered.
Firstly UK royalties on book sales is a vatable supply, so if you are already VAT registered through another business but in the same legal entity – e.g. you write a book as an individual and are also self-employed as an individual – then you will have to account for VAT on your UK royalties. Similarly if your only source of self employment is through writing but your income from that source exceeds £85,000 you will need to register for VAT.
If your only income derives from writing you may consider voluntarily registering for VAT even if your turnover does not breach the turnover limit. Whilst VAT will need to be charged on your royalties this will have a neutral impact on your publisher as they will be able to recover the VAT against future book sales, however once registered for VAT you will be able to recover the VAT on agency fees, marketing costs, accountancy and legal fees, telephone costs, stationery and computer costs etc…. Potentially the VAT saving could be significant and should not be overlooked.
Once registered it is essential you notify your publisher and agent straight away so that VAT on your UK royalties are paid over.
Using a Limited Company
In some circumstances it might be appropriate to conduct your business through a limited company. This could have advantages in terms of lower tax rates and is often a more flexible structure for involving family members financially in your writing business. However there would be extra costs and compliance involved with running a company.
This is a decision that will vary depending on your tax and financial position and what your future plans are so you should always seek bespoke advice before embarking on this route.
One word of warning is that if you have already begun writing a book for example and you then decided that you wanted the income derived to be taxed through a company you would pay income tax on the deemed market value of your intellectual property at the time it was transferred to the company. So any offers for publication would be taxable on you as an individual but sales above the advance would be taxed through the company. The lesson is therefore it pays to make your decision early. It might be prudent to set up a company and keep it dormant for a while so it is already in place before you start creating!
Where do I go for help?
Dealing with the accounts and tax for most creatives is daunting. The income generated often causes the need for a tax return and accounts, even where profits are modest. If you are successful or your income fluctuates then there are huge opportunities for tax savings. Therefore finding a professional adviser who understands writers could save stress and provide the comfort of knowing your affairs are in safe hands and that your tax liabilities will be minimised. If you are looking for accountants and tax advisors who understand the complexities of accounting for writers then you can contact Jan Friend who will be happy to discuss your individual circumstances.
The content in this blog is correct as at 10 September 2021 See terms and conditions.