HW Fisher & Company is a commercially astute accountancy company with a personal, partner-led service aimed at entrepreneurial small, medium enterprises (SMEs), large corporates and high-net worth individuals.
Their clients come from many different backgrounds and are active in all branches of commerce and industry. They have a reputation grounded in quality, delivering premium advisory services efficiently and cost-effectively. Very supportive of writers, and experienced in managing their affairs, they represent many big names and sponsor the New Blood Panel that features at Theakston’s Old Peculier Crime Writing Festival in Harrogate every year. Here Barry Kenyon gives you some hints and tips – aimed at writers based in the UK, many are relevant whatever your jurisdiction and HW Fisher represent many Irish writers too.
A Miscellany of hints, tips, wrinkles and points of information for writers based in the UK
UK writers have to cope with income tax, national insurance, sometimes VAT and all the necessary record keeping. This article attempts to cover a number of points of importance.
- Following a change in the rules it is now necessary for all authors to register for self- assessment if they wish to be able to claim credit for pension and benefit purposes and pay the appropriate amount of Class 2 national insurance contributions. In other words, writers will need to opt in. Those people with earnings (profits) less than £5,965 per annum can apply for exemption but, if they do so, they will not build up a credit for state pension purposes. Registration can be done via gov.uk
- Under the system of self-assessment, record keeping is extremely important. In an enquiry, HM Revenue and Customs will often try to cast doubt on the accuracy of the records which enables them to argue that expenses should be disallowed. It is important, therefore, to record all items of income and expenditure and to keep as many receipts as possible, together with other supporting evidence such as bank statements and credit card statements. It is useful to annotate these statements in order to clarify the nature of any given item where there is no supporting paperwork. It is also a good idea to keep a diary which serves as a non-financial record of your activities and can support claims for expenses such as travelling, taxis etc. The following guidance on particular types of expenses may be helpful:
- Car and telephone expenses – Keep a log or diary note for a sample period of, say, three months, and base the annual claim on the percentage this produces. Alternatively, for car costs, simply keep a record of business miles and apply the 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. Those working from home 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, it may be necessary to restrict the claim by reference to the number of hours spent working at home.
It is 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.
- 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.
- Travelling – It is not a statutory requirement that you 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. Sometimes there just isn’t time to remember or to 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, with a separate claim being made for the commission and VAT costs. Apart from being the technically correct way of making the declaration, showing the income after deductions may lead to an enquiry by HM Revenue and Customs because they 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, particularly in the early days of the profession. 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.
- The United Kingdom 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, HM Revenue and Customs can deny the relief. Claims should always be made under the applicable double taxation agreement. Claim forms have to be certified by HM Revenue and Customs and there are generally standard forms available for completion.
Authors living outside the United Kingdom 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 United Kingdom. This is regardless of whether there is a double taxation agreement in place.
- In the recent Budget it was announced that writers earning less than £1,000 in any given tax year will have no liability to tax. If their income exceeds £1,000, they will be able to deduct £1,000 as a notional expense allowance or to claim the actual expenses, if higher. This will be 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 quite often possible to effect tax savings. National insurance liabilities can be reduced, profits can be distributed to family co-shareholders in the form of dividends, the rate of corporation tax is currently 20% which is much lower than the 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 through which 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 HM Revenue and Customs.
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.
Some VAT points
It is not compulsory to register for VAT until your turnover (i.e. total self-employed income from all sources) exceeds £83,000 a year (from 1 April 2016 – this is much lower in Ireland). You can, however, register voluntarily, no matter what your turnover is.
Beware of the implications of ‘Scale Charges’ for motoring costs 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 probably wise to consult an accountant to examine and explain the benefits and pitfalls of VAT registration first, and also the accounting system to be employed.
Under what is known as the “Flat Rate Scheme” the VAT liability can be determined as a percentage of turnover, for businesses or individuals with an annual taxable turnover of less than £150,000 excluding VAT.
From January 2015 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
When registered for VAT you can reclaim the VAT on your expenses. The Flat Rate Scheme provides a simplified method of paying over less that you collect in. 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 is important to notify publishers of VAT registration as they should be adding VAT to royalty payments. Most publishers operate a self-billing system so once they have the writer’s VAT number, they can produce documentation that saves the writer submitting a VAT invoice.
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.
For further information, please contact Barry on 020 7874 7875. We have an authors and freelance journalists’ tax guide which can be found here – you may find this to be useful.
(c) Barry Kernon, Consultant
Contact Barry for information about HW Fischer & Company at 0044 20 7874 7875 or email him at firstname.lastname@example.org