Finance for writers and artists
Peter Vaines, a tax barrister, addresses some frequently asked questions.
What can a working writer claim against tax?
A working writer is carrying on a business and can therefore claim all the expenses which are incurred wholly and exclusively for the purposes of that business. A list showing most of the usual expenses can be found in the article on Income tax (see here) but there will be other expenses that can be allowed in special circumstances. Strictly, only expenses which are incurred for the sole purpose of the business can be claimed; there must be no ‘duality of purpose’ so an item of expenditure cannot be divided into private and business parts. However, HM Revenue & Customs are now able to allow all reasonable expenses (including apportioned sums) where the amounts can be commercially justified.
Allowances can also be claimed for the cost of business assets such as a car, personal computers, printers and scanners and all other equipment (including books) which may be used by the writer. An allowance of 100% of the cost can now be claimed for most assets except cars, for which a lower allowance can be claimed. See the article on Income tax for further details of the deductions available in respect of capital expenditure.
Can I request interest on fees owed to me beyond 30 days of my invoice?
Yes. A writer is like any other person carrying on a business and is entitled to charge interest at a rate of 8% over bank base rate on any debt outstanding for more than 30 days – although the period of credit can be varied by agreement between the parties. It is not compulsory to claim the interest; it is your decision whether to enforce the right.
What can I do about bad debts?
A writer is in exactly the same position as anybody else carrying on a business over the payment of his or her invoices. It is generally not commercially sensible to insist on payment in advance but where the work involved is substantial (e.g. a book), it is usual to receive one third of the fee on signature, one third on delivery of the manuscript and the remaining one third on publication. On other assignments, perhaps not as substantial as a book, it could be worthwhile seeking 50% of the fee on signature and the other 50% on delivery. This would provide a degree of protection in case of cancellation of the assignment because of changes of policy or personnel at the publisher.
What financial disputes can I take to the Small Claims Court?
If somebody owes you money you can take them to the Small Claims section of your local County Court, which deals with financial disputes up to £10,000. It is much less formal than normal court proceedings and involves little expense. It is not necessary to have a solicitor. You fill in some forms, turn up and explain why you are owed the money (see www.gov.uk/make-court-claim-for-money/overview).
If I receive an advance, can I divide it between two tax years?
Yes. There is a system known as ‘averaging’. This enables writers (and others engaged in the creation of literary or dramatic works or designs) to average the profits of two or more consecutive years if the profits for one year are less than 75% of the profits for the highest year. This relief can apply even if the work takes less than 12 months to create and it allows the writer to avoid the higher rates of tax which might arise if the income in respect of a number of years’ work were all to be concentrated in a single year.
How do I make sure I am taxed as a self-employed person so that tax and National Insurance contributions are not deducted at source?
To be taxed as a self-employed person you have to make sure that the contract for the writing cannot be regarded as a contract of employment. This is unlikely to be the case with a professional author. The subject is highly complex but one of the most important features is that the publisher must not be in a position to direct or control the author’s work. Where any doubt exists, the author might find the publisher deducting tax and National Insurance contributions as a precaution and that would clearly be highly disadvantageous. The author would be well advised to discuss the position with the publisher before the contract is signed to agree that he or she should be treated as self-employed and that no tax or National Insurance contributions will be deducted from any payments. If such agreement cannot be reached, professional advice should immediately be sought so that the detailed technical position can be explained to the publisher.
Is it a good idea to operate through a limited company?
It can be a good idea for a self-employed writer to operate through a company but generally only where the income is quite large. The costs of operating a company can outweigh any benefit if the writer is paying tax only at the basic rate. Where the writer is paying tax at the higher rate of 40% (or 45%), being able to retain some of the income in a company at a tax rate of only 19% is obviously attractive. However, this will be entirely ineffective if the writer’s contract with the publisher would otherwise be an employment. The whole subject of operating through a company is complex and professional advice is essential.
When does it become necessary to register for VAT?
Where the writer’s self-employed income (from all sources, not only writing) exceeds £85,000 in the previous 12 months or is expected to do so in the next 30 days, he or she must register for VAT and add VAT to all his/her fees. The publisher will pay the VAT to the writer, who must pay the VAT over to HM Revenue & Customs each quarter. Any VAT the writer has paid on business expenses and on the purchase of business assets can be deducted. It is possible for some authors to take advantage of the simplified system for VAT payments which applies to small businesses. This involves a flat rate payment of VAT without any need to keep records of VAT on expenses.
If I make a loss from my writing can I get any tax back?
Where a writer makes a loss, HM Revenue & Customs may suggest that the writing is only a hobby and not a professional activity, thereby denying any relief or tax deduction for the loss. However, providing the writing is carried out on a sensible commercial basis with an expectation of profits, any resulting loss can be offset against any other income the writer may have for the same or the previous year.
Despite attempts by successive governments to simplify our taxation system, the subject has become increasingly complicated. Peter Vaines, a chartered accountant and barrister, gives a broad outline of taxation from the point of view of writers and other creative professionals. The proposals in the November 2017 Budget are broadly reflected in this article.
How income is taxed
Generally
Authors are usually treated for tax purposes as carrying on a profession and are taxed in a similar fashion to other self-employed professionals. This article is directed to self-employed persons only, because if a writer is employed he or she will be subject to the much less advantageous rules which apply to employment income.
Employed persons may try to shake off the status of ‘employee’ to attain ‘freelance’ status so as to qualify for the tax advantages, but such attempts meet with varying degrees of success. The problems involved in making this transition are considerable and space does not permit a detailed explanation to be made here – individual advice is necessary if difficulties are to be avoided.
Particular attention has been paid by HM Revenue & Customs (HMRC) to journalists and a number of sectors such as those engaged in the entertainment industry with a view to reclassifying them as employees so that PAYE is deducted from their earnings. This blanket treatment has been extended to other areas and, although it is obviously open to challenge by individual taxpayers, it is always difficult to persuade HMRC to change its views.
There is no reason why employed people cannot carry on a freelance business in their spare time. Indeed, aspiring authors, artists, musicians, etc often derive so little income from their craft that the financial security of an employment, perhaps in a different sphere of activity, is necessary. The existence of the employment is irrelevant to the taxation of the freelance earnings, although it is most important not to confuse the income or expenditure of the employment with that of the self-employed activity. HMRC is aware of the advantages which can be derived by an individual having ‘freelance’ income from an organisation of which he or she is also an employee, and where such circumstances are contrived, it can be extremely difficult to convince an Inspector of Taxes that a genuine freelance activity is being carried on. Where the individual operates through a company or partnership providing services personally to a particular client, and would be regarded as an employee if the services were supplied directly by the individual, additional problems arise from the notorious IR35 legislation and professional advice is essential.
For those starting in business or commencing work on a freelance basis there is a useful section called ‘Working for yourself’ on the GOV.UK website (www.gov.uk/working-for-yourself/overview).
Income
For income to be taxable it need not be substantial, nor even the author’s only source of income; earnings from casual writing are also taxable but this can be an advantage because occasional writers do not often make a profit from their writing. The expenses incurred in connection with writing may well exceed any income receivable and the resultant loss may then be used to reclaim tax paid on other income. Certain allowable expenses and capital allowances may be deducted from the income, and these are set out in more detail below. The possibility of a loss being used as a basis for a tax repayment is fully appreciated by HMRC, which sometimes attempts to treat casual writing as a hobby so that any losses incurred cannot be used to reclaim tax; of course by the same token any income receivable would not be chargeable to tax. This treatment may sound attractive but it should be resisted vigorously because HMRC does not hesitate to change its mind when profits begin to arise. However, in exceptional or non-recurring writing, such as the autobiography of a sports personality or the memoirs of a politician, it could be better to be treated as pursuing a hobby and not as a professional author. Sales of copyright cannot be charged to income tax unless the recipient is a professional author – but the proceeds of sale of copyright may be charged to capital gains tax in the hands of an individual who is not a professional author.
Royalties
Where the recipient is a professional author, the proceeds of sale of copyright are taxable as income and not as capital receipts. Similarly, lump sums on account of, or in advance of royalties are also taxable as income in the year of receipt, subject to a claim for averaging relief (see below).
Copyright royalties are generally paid without deduction of income tax. However, if royalties are paid to a person who normally lives abroad, tax must be deducted by the payer or his agent at the time the payment is made unless arrangements are made with HMRC for payments to be made gross under the terms of a Double Taxation Agreement with the other country.
Grants, prizes and awards
Persons in receipt of grants from the Arts Council or similar bodies will be concerned whether or not such grants are liable to income tax. Many years ago HMRC issued a Statement of Practice after detailed discussions with the Arts Council regarding the tax treatment of the awards. Grants and other receipts of a similar nature were divided into two categories (see box) – those which were to be treated by HMRC as chargeable to tax and those which were not. Category A awards were considered to be taxable; awards made under category B were not chargeable to tax.
The Statement of Practice has not been withdrawn but it is no longer publicly available – although there is nothing to suggest that the treatment of awards in these categories will not continue to be treated in this way. In any event, the statement had no legal force and was merely and expression of the view of HMRC. It remains open to anybody in receipt of a grant or award to challenge the HMRC view on the merits of their own case.
The tax position of persons in receipt of literary prizes will generally follow a decision by the Special Commissioners in connection with the Whitbread Book Awards (now called the Costa Book Awards). In that case it was decided that the prize was not part of the author’s professional income and accordingly not chargeable to tax. The precise details are not available because decisions of the Special Commissioners were not, at that time, reported unless an appeal was made to the High Court; HMRC chose not to appeal against this decision. Details of the many literary awards that are given each year start here, and this decision is of considerable significance to the winners of these prizes. It would be unwise to assume that all such awards will be free of tax as the precise facts which were present in the case of the Whitbread awards may not be repeated in another case; however, it is clear that an author winning a prize has some very powerful arguments in his or her favour, should HMRC seek to charge tax on the award.
Allowable expenses
To qualify as an allowable business expense, expenditure has to be laid out wholly and exclusively for business purposes. Strictly there must be no ‘duality of purpose , which means that expenditure cannot be apportioned to reflect private and business usage, for example food, clothing, telephone, travelling expenses, etc. However, HMRC will usually allow all reasonable expenses (including apportioned sums) where the amounts can be commercially justified.
It should be noted carefully that the expenditure does not have to be ‘necessary’, it merely has to be incurred ‘wholly and exclusively’ for business purposes. Naturally, however, expenditure of an outrageous and wholly unnecessary character might well give rise to a presumption that it was not really for business purposes. As with all things, some expenses are unquestionably allowable and some expenses are equally unquestionably not allowable – it is the grey area in between which gives rise to all the difficulties and the outcome invariably depends on negotiation with HMRC.
Arts Council awards
Arts Council category A awards
•Direct or indirect musical, design or choreographic commissions and direct or indirect commission of sculpture and paintings for public sites.
•The Royalty Supplement Guarantee Scheme.
•The Contract Writers’ Scheme.
•Jazz bursaries.
•Translators’ grants.
•Photographic awards and bursaries.
•Film and video awards and bursaries.
•Performance Art Awards.
•Art Publishing Grants.
•Grants to assist with a specific project or projects (such as the writing of a book) or to meet specific professional expenses such as a contribution towards copying expenses made to a composer or to an artist’s studio expenses.
Arts Council category B awards
•Bursaries to trainee directors.
•Bursaries for associate directors.
•Bursaries to people attending full-time courses in arts administration (the practical training course).
•In-service bursaries to theatre designers and bursaries to trainees on the theatre designers’ scheme.
•In-service bursaries for administrators.
•Bursaries for actors and actresses.
•Bursaries for technicians and stage managers.
•Bursaries made to students attending the City University Arts Administration courses.
•Awards, known as the Buying Time Awards, made not to assist with a specific project or professional expenses but to maintain the recipient to enable him or her to take time off to develop his or her personal talents. These include the awards and bursaries known as the Theatre Writing Bursaries, awards and bursaries to composers, awards and bursaries to painters, sculptors and print makers, literature awards and bursaries.
Great care should be taken when claiming a deduction for items where there may be a duality of purpose and negotiations should be conducted with more than usual care and courtesy – if provoked, the Inspector of Taxes may well choose to allow nothing. An appeal is always possible although unlikely to succeed as a string of cases in the Courts has clearly demonstrated. An example is the case of Caillebotte v. Quinn where the taxpayer (who normally had lunch at home) sought to claim the excess cost of meals incurred because he was working a long way from his home. The taxpayer’s arguments failed because he did not eat only in order to work, one of the reasons for his eating was in order to sustain his life; a duality of purpose therefore existed and no tax relief was due.
Other cases have shown that expenditure on clothing can also be disallowed if it is the kind of clothing which is in everyday use, because clothing is worn not only to assist the pursuit of one’s profession but also to accord with public decency. This duality of purpose may be sufficient to deny relief – even where the particular type of clothing is of a kind not otherwise worn by the taxpayer. In the case of Mallalieu v. Drummond a barrister failed to obtain a tax deduction for items of sombre clothing that she purchased specifically for wearing in Court. The House of Lords decided that a duality of purpose existed because clothing represented part of her needs as a human being.
Allowances
Despite the above, Inspectors of Taxes are not usually inflexible and the following list of expenses are among those generally allowed.
(a) Cost of all materials used up in the course of the work’s preparation.
(b) Cost of typewriting and secretarial assistance, etc; if this or other help is obtained from one’s spouse then it is entirely proper for a deduction to be claimed for the amounts paid for the work. The amounts claimed must actually be paid to the spouse and should be at the market rate, although some uplift can be made for unsocial hours, etc. Payments to a spouse are of course taxable in their hands and should therefore be most carefully considered. The spouse’s earnings may also be liable for National Insurance contributions and it is important to take care because otherwise you may find that these contributions outweigh the tax savings. The impact of the National Minimum Wage should also be considered.
(c) All expenditure on normal business items such as postage, stationery, telephone, email, printers and scanners, agent’s fees, accountancy charges, photography, subscriptions, periodicals, magazines, etc may be claimed. The cost of daily papers should not be overlooked if these form part of research material. Visits to theatres, cinemas, etc for research purposes may also be permissible (but not the costs relating to guests). Unfortunately, expenditure on all types of business entertaining is specifically denied tax relief.
(d) If work is conducted at home, a deduction for ‘use of home’ is usually allowed providing the amount claimed is reasonable. If the claim is based on an appropriate proportion of the total costs of rent, light and heat, cleaning and maintenance, insurance, etc (but not the Council Tax), care should be taken to ensure that no single room is used ‘exclusively’ for business purposes, because this may result in the Capital Gains Tax exemption on the house as the only or main residence being partially forfeited. However, it would be a strange household where one room was in fact used exclusively for business purposes and for no other purpose whatsoever (e.g. storing personal bank statements and other private papers); the usual practice is to claim a deduction on the basis that most or all of the rooms in the house are used at one time or another for business purposes, thereby avoiding any suggestion that any part was used exclusively for business purposes.
(e) The appropriate business proportion of motor running expenses may also be claimed although what is the appropriate proportion will naturally depend on the particular circumstances of each case. It should be appreciated that the well-known scale of benefits, whereby employees are taxed according to the size of the car’s CO2 emissions, do not apply to self-employed persons.
(f) It has been long established that the cost of travelling from home to work (whether employed or self-employed) is not an allowable expense. However, if home is one’s place of work then no difficulties are likely to arise.
(g) Travelling and hotel expenses incurred for business purposes will normally be allowed but if any part could be construed as disguised holiday or pleasure expenditure, considerable thought would need to be given to the commercial reasons for the journey in order to justify the claim. The principle of ‘duality of purpose’ will always be a difficult hurdle in this connection – although not insurmountable.
(h) If a separate business bank account is maintained, any overdraft interest on the account will be an allowable expense. This is the only circumstance in which overdraft interest is allowed for tax purposes.
(i) Where capital allowances (see below) are claimed for a personal computer, laptop, iPad, printer, mobile phone, television, CD or DVD player, etc used for business purposes, the costs of maintenance and repair of the equipment may also be claimed.
Clearly many other allowable items may be claimed in addition to those listed. Wherever there is any reasonable business motive for some expenditure it should be claimed as a deduction although it is necessary to preserve all records relating to the expense. It is sensible to avoid an excess of imagination as this would naturally cause the Inspector of Taxes to doubt the genuineness of other expenses claimed.
The question is often raised whether the whole amount of an expense may be deducted or whether the VAT content must be excluded. Where VAT is reclaimed from HMRC by someone who is registered for VAT, the VAT element of the expense cannot be treated as an allowable deduction. Where the VAT is not reclaimed, the whole expense (inclusive of VAT) is allowable for income tax purposes.
Capital allowances
Where expenditure of a capital nature is incurred, it cannot be deducted from income as an expense – a separate and sometimes more valuable capital allowance being available instead. Capital allowances are given for many different types of expenditure, but authors and similar professional people are likely to claim only for ‘plant and machinery’; this is a very wide expression which may include cars, personal computers, laptops, iPads, printers, televisions, CD and DVD players used for business purposes. Plant and machinery will normally qualify for an allowance of 100%.
The reason capital allowances can be more valuable than allowable expenses is that they may be wholly or partly disclaimed in any year that full benefit cannot be obtained – ordinary business expenses cannot be similarly disclaimed. Where, for example, the income of an author is not large enough to bring him above the tax threshold, he would not be liable to tax and a claim for capital allowances would be wasted. If the capital allowances were to be disclaimed their benefit would be carried forward for use in subsequent years. This would also be advantageous where the income is likely to be taxable at the higher rate of 40% (or the 45% rate) in a subsequent year. Careful planning with claims for capital allowances is therefore essential if maximum benefit is to be obtained.
Leasing is a popular method of acquiring fixed assets, and where cash is not available to enable an outright purchase to be made, assets may be leased over a period of time. Whilst leasing may have financial benefits in certain circumstances, in normal cases there is likely to be no tax advantage in leasing an asset where the alternative of outright purchase is available.
Books
The question of whether the cost of books is eligible for tax relief has long been a source of difficulty. The annual cost of replacing books used for the purposes of one’s professional activities (e.g. the cost of a new Writers’ & Artists’ Yearbook each year) has always been an allowable expense; the difficulty arose because the initial cost of reference books, etc (e.g. when commencing one’s profession) was treated as capital expenditure but no allowances were due as the books were not considered to be ‘plant’. However, the matter was clarified by the case of Munby v. Furlong in which the Court of Appeal decided that the initial cost of law books purchased by a barrister was expenditure on ‘plant’ and eligible for capital allowances. This is clearly a most important decision, particularly relevant to any person who uses expensive books in the course of exercising his or her profession.
Pension contributions
Where a self-employed person makes contributions to a pension scheme, those contributions are usually deductible.
These arrangements are generally advantageous in providing for a pension as contributions are usually paid when the income is high (and the tax relief is also high) and the pension (taxed as earned income when received) usually arises when the income is low and a lower rate of tax may be payable. There is also the opportunity to take part of the pension entitlement as a tax-free lump sum. It is necessary to take into account the possibility that the tax advantages could go into reverse. When the pension is paid it could, if rates rise again, be taxed at a higher rate than the rate of tax relief presently available for the contributions.
Each individual is allowed a lifetime pension pot (which has been gradually reduced and is now down to £1 million). When benefits crystallise, which will generally be when a pension begins to be paid, this is measured against the individual’s lifetime pension pot with any excess being taxed at the individual’s marginal rate of tax.
Each individual also has an annual allowance for contributions to the pension fund, which is £40,000 but this is severely reduced for those paying the higher rates of tax. If the annual increase in an individual’s rights under all registered schemes of which he is a member exceeds the annual allowance, the excess is chargeable to tax.
For many writers and artists this means that they can contribute a significant part of their earnings to a pension scheme (if they can afford to do so) without any of the previous complications. It is still necessary to be careful where there is other income giving rise to a pension because the whole of the pension entitlement has to be taken into account.
Flexible retirement is possible allowing members of occupational pension schemes to continue working while also drawing retirement benefits.
Class 4 National Insurance contributions
Allied to pensions is the payment of Class 4 National Insurance contributions, which are payable in addition to the normal Class 2 (self-employed) contributions. The rates are changed each year and for 2018/19 self-employed persons will be obliged to contribute 9% of their profits between the range £8,424–£46,350 per annum plus 2% on earnings above £46,350. This amount is collected in conjunction with the annual income tax liability.
Averaging relief
Relief for copyright payments
Professional authors and artists engaged in the creation of literary or dramatic works or designs may claim to average the profits of two or more consecutive years if the profits for one year are less than 75% of the profits for the highest year. This relief can apply even if the work took less than 12 months to create and is available to people who create works in partnership with others. It enables the creative artist to utilise their allowances fully and to avoid the higher rates of tax which might apply if all the income were to arise in a single year.
Collection of tax: self-assessment
Under ‘self-assessment’ you submit your tax return and work out your tax liability for yourself. If you get it wrong, or if you are late with your tax return or the payment of tax, interest and penalties will be charged. Completing a tax return is a daunting task but the term ‘self-assessment’ is not intended to imply that individuals have to do it themselves; they can (and often will) engage professional help. The term is only intended to convey that it is the taxpayer, and not HMRC, who is responsible for getting the tax liability right and for it to be paid on time.
The deadline for filing your tax return is 31 January following the end of the tax year. You must now file online; a paper tax return cannot be filed in most cases.
Income tax on self-employed earnings remains payable in two instalments on 31 January and 31 July each year. Because the accurate figures may not necessarily be known, these payments in January and July will therefore be only payments on account based on the previous year’s liability. The final balancing figure will be paid the following 31 January together with the first instalment of the liability for the following year.
When HMRC receives the self-assessment tax return, it is checked to see if there is anything obviously wrong; if there is, a letter will be sent to you immediately. Otherwise, HMRC has 12 months from the filing date in which to make further enquiries; if it doesn’t, it will have no further opportunity to do so and your tax liabilities are final – unless there is an error or an omission. In that event, HMRC can raise an assessment later to collect any extra tax together with appropriate penalties. It is essential that all records relevant to your tax return are retained for at least 12 months after the filing date in case they are needed by HMRC. For the self-employed, the record-keeping requirement is much more onerous because the records need to be kept for nearly six years. If you claim a tax deduction for an expense, it will be necessary to have a receipt or other document proving that the expenditure has been made. Because the existence of the underlying records is so important to the operation of self-assessment, HMRC will treat them very seriously and there are penalties for a failure to keep adequate records.
Interest
Interest is chargeable on overdue tax at a variable rate, which is presently 3% per annum. It does not rank for any tax relief, which can make HMRC an expensive source of credit.
However, HMRC can also be obliged to pay interest (known as repayment supplement) tax-free where repayments are delayed. The rules relating to repayment supplement are less beneficial and even more complicated than the rules for interest payable but they do exist and can be very welcome if a large repayment has been delayed for a long time. Unfortunately, the rate of repayment supplement is only 0.5% and is always less than the rate charged by HMRC on overdue tax.
Value added tax
The activities of writers, painters, composers, etc are all ‘taxable supplies’ within the scope of VAT and chargeable at the standard rate. (Zero rating which applies to publishers, booksellers, etc on the supply of books does not extend to the work performed by writers.) Accordingly, authors are obliged to register for VAT if their income for the past 12 months exceeds £85,000 or if their income for the coming month will exceed that figure.
Delay in registering can be a most serious matter because if registration is not effected at the proper time, HMRC can (and invariably do) claim VAT from all the income received since the date on which registration should have been made. As no VAT would have been included in the amounts received during this period the amount claimed by HMRC must inevitably come straight from the pocket of the author.
The author may be entitled to seek reimbursement of the VAT from those whom he or she ought to have charged VAT but this is obviously a matter of some difficulty and may indeed damage his or her commercial relationships. Apart from these disadvantages there is also a penalty for late registration. The rules are extremely harsh and are imposed automatically even in cases of innocent error. It is therefore extremely important to monitor the income very carefully because if in any period of 12 months the income exceeds the £85,000 limit, HMRC must be notified within 30 days of the end of the period. Failure to do so will give rise to an automatic penalty. It should be emphasised that this is a penalty for failing to submit a form and has nothing to do with any real or potential loss of tax. Furthermore, whether the failure was innocent or deliberate will not matter. Only the existence of a ‘reasonable excuse’ will be a defence to the penalty. However, a reasonable excuse does not include ignorance, error, a lack of funds or reliance on any third party.
However, it is possible to regard VAT registration as a privilege and not a penalty, because only VAT registered persons can reclaim VAT paid on their expenses such as stationery, telephone, professional fees, etc and even computers and other plant and machinery (excluding cars). However, many find that the administrative inconvenience – the cost of maintaining the necessary records and completing the necessary forms – more than outweighs the benefits to be gained from registration and prefer to stay outside the scope of VAT for as long as possible.
Overseas matters
The general observation may be made that self-employed persons resident and domiciled in the UK are not well treated with regard to their overseas work, being taxable on their worldwide income. It is important to emphasise that if fees are earned abroad, no tax saving can be achieved merely by keeping the money outside the country. Although exchange control regulations no longer exist to require repatriation of foreign earnings, such income remains taxable in the UK and must be disclosed to HMRC; the same applies to interest or other income arising on any investment of these earnings overseas. Accordingly, whenever foreign earnings are likely to become substantial, prompt and effective action is required to limit the impact of UK and foreign taxation. In the case of nonresident authors it is important that arrangements concerning writing for publication in the UK, for example in newspapers, are undertaken with great care. A case concerning the wife of one of the great train robbers who provided detailed information for a series of articles published in a Sunday newspaper is most instructive. Although she was acknowledged to be resident in Canada for all the relevant years, the income from the articles was treated as arising in this country and fully chargeable to UK tax.
The UK has double taxation agreements with many other countries and these agreements are designed to ensure that income arising in a foreign country is taxed either in that country or in the UK. Where a withholding tax is deducted from payments received from another country (or where tax is paid in full in the absence of a double taxation agreement), the amount of foreign tax paid can usually be set off against the related UK tax liability.
Many successful authors can be found living in Eire because of the complete exemption from tax which attaches to works of cultural or artistic merit by persons who are resident there. However, such a step should only be contemplated having careful regard to all the other domestic and commercial considerations and specialist advice is essential if the exemption is to be obtained and kept; a careless breach of the conditions could cause the exemption to be withdrawn with catastrophic consequences. Consult the Revenue Commissioners in Dublin (www.revenue.ie) for further information concerning the precise conditions to be satisfied for exemption from tax in the Republic of Ireland.
Companies
When authors become successful the prospect of paying tax at high rates may drive them to take hasty action, such as the formation of a company, which may not always be to their advantage. Indeed some authors seeing the exodus into tax exile of their more successful colleagues even form companies in low tax areas in the hope of saving large amounts of tax. HMRC is fully aware of these possibilities and has extensive powers to charge tax and combat avoidance. Accordingly, such action is just as likely to increase tax liabilities and generate other costs and should never be contemplated without expert advice; some very expensive mistakes are often made in this area which are not always able to be remedied.
To conduct one’s business through the medium of a company can be a very effective method of mitigating tax liabilities, and providing it is done at the right time and under the right circumstances very substantial advantages can be derived. However, if done without due care and attention the intended advantages will simply evaporate. At the very least it is essential to ensure that the company’s business is genuine and conducted properly with regard to the realities of the situation. If the author continues his/her activities unchanged, simply paying all the receipts from his/her work into a company’s bank account, he/she cannot expect to persuade HMRC that it is the company and not himself/herself who is entitled to, and should be assessed to tax on, that income.
It must be strongly emphasised that many pitfalls exist which can easily eliminate all the tax benefits expected to arise by the formation of the company. For example, company directors are employees of the company and will be liable to pay much higher National Insurance contributions; the company must also pay the employer’s proportion of the contribution and a total liability of nearly 26% of gross salary may arise. This compares most unfavourably with the position of a self-employed person. Moreover, on the commencement of the company’s business the individual’s profession will cease and the possibility of revisions being made by HMRC to earlier tax liabilities means that the timing of a change has to be considered very carefully.
The tax return
No mention has been made above of personal reliefs and allowances; this is because these allowances and the rates of tax are subject to constant change and are always set out in detail in the explanatory notes which accompany the tax return. The annual tax return is an important document and should be completed promptly with extreme care. If filling in the tax return is a source of difficulty or anxiety, Money Which? – Tax Saving Guide (Consumer Association, annual, March) is very helpful.
Peter Vaines is a barrister at Field Court Tax Chambers in Gray’s Inn. He writes and speaks widely on tax matters.
See also...
• FAQs for writers, here
• National Insurance contributions and social security benefits, here
National Insurance contributions and social security benefits
Most people who work in Great Britain either as an employee or as a self-employed person are liable to pay Class 1 National Insurance contributions. The law governing this subject is complex and Peter Arrowsmith FCA and Sarah Bradford summarise it here for the benefit of writers and artists. This article also contains an outline of the benefits system and should be regarded as a general guide only.
All contributions are payable in respect of years ending on 5 April. See box (below) for the classes of contributions.
Classes of contributions
Class 1 Payable by employees (primary contributions) and their employers (secondary contributions), based on earnings.
Class 1A Payable only by employers in respect of all taxable benefits in kind. Class 1B Payable only by employers in respect of PAYE Settlement Agreements entered into by them.
Class 2 Weekly flat rate contributions payable by the self-employed.
Class 3 Weekly flat rate contributions, payable on a voluntary basis in order to provide, or make up entitlement to, certain social security benefits.
Class 3A Voluntary contributions payable from 12 October 2015 until 5 April 2017 by those reaching state pension age before 6 April 2016. Amount depends on age.
Class 4 Payable by the self-employed in respect of their trading or professional income, based on earnings.
Employed or self-employed?
Employed earners pay Class 1 contributions and self-employed earners currently pay Class 2 and Class 4 contributions. It is therefore essential to know the status of a worker to ensure that the correct class of contribution is paid. The question as to whether a person is employed under a contract of service and is thereby an employed earner liable to Class 1 contributions, or performs services (either solely or in partnership) under a contract for service and is there by self-employed and liable to Class 2 and Class 4 contributions, often has to be decided in practice. One of the more longstanding guides can be found in the case of Market Investigations Ltd v. Minister of Social Security (1969 2 WLR 1) when Cooke J. remarked:
‘...the fundamental test to be applied is this: “Is the person who has engaged himself to perform these services performing them as a person in business on his own account?” If the answer to that question is “yes”, then the contract is a contract for services. If the answer is “no”, then the contract is a contract of service. No exhaustive list has been compiled and perhaps no exhaustive list can be compiled of the considerations which are relevant in determining that question, nor can strict rules be laid down as to the relative weight which the various considerations should carry in particular cases. The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor; and that factors which may be of importance are such matters as:
• whether the man performing the services provides his own equipment,
• whether he hires his own helpers,
• what degree of financial risk he takes,
• what degree of responsibility for investment and management he has, and
• whether and how far he has an opportunity of profiting from sound management in the performance of his task.’
The above case has often been considered subsequently in Tribunal cases, but there are many factors to take into account. Increasingly, workers do not fit neatly into either category, and following the Taylor Review into Modern Working Practices, the government published a consultation in February 2018 on proposals to make the employment status rules clearer. The consultation document is available on the GOV.UK website at www.gov.uk/government/consultations/employment-status. Further guidance on employment status can be found on the GOV.UK website at www.gov.uk/government/collections/employed-or-self-employed. HMRC also produce an employment status tool which can be used to determine if a worker is an employed or self-employed earner (see www.gov.uk/guidance/check-employment-status-for-tax).
Exceptions
There are exceptions to the above rules, those most relevant to artists and writers being:
• the employment of a spouse or civil partner is disregarded for National Insurance purposes unless it is for the purposes of a trade or profession (e.g. the employment of one’s spouse by an author would not be disregarded and would result in a liability for contributions if their spouse’s reached the minimum levels);
• the employment of certain relatives in a private dwelling house in which both employee and employer reside is disregarded for social security purposes provided the employment is not for the purposes of a trade or business carried out at those premises by the employer. This would cover the employment of a relative (as defined) as a housekeeper in a private residence.
Personal service companies
Since 6 April 2000, those who have control of their own ‘one-man service companies’ are subject to special rules (commonly referred to as IR35). If the work carried out by the owner of the company for the company’s customers would be – but for the one-man company – considered as an employment of that individual (i.e. rather than self-employment), a deemed salary may arise. If it does, then some or all of the company’s income will be treated as salary liable to PAYE and National Insurance contributions (NICs). This will be the case whether or not such salary is actually paid by the company. The same situation may arise where the worker owns as little as 5% of a company’s share capital.
The calculations required by HMRC are complicated and have to be done very quickly at the end of each tax year (even if the company’s year-end does not coincide). It is essential that affected businesses seek detailed professional advice about these rules which may also, in certain circumstances, apply to partnerships.
The rules, as they apply where the end client is a public service body, were reformed from 6 April 2017. Under these rules, the responsibility for deciding whether IR35 applies (i.e. would the worker be an employee if employed under a direct contract) is shifted to the public sector body and responsibility for deducting PAYE and NIC due on the deemed payment (which is calculated without the 5% cost allowance) is transferred to the fee-payer, which may be an agency.
At the time of the 2018 Spring Statement, the government confirmed that they would be consulting on reforms where the end client is in the private sector, and looking at extending the scope of the public sector reforms where services are provided via an intermediary to a private-sector end client.
In order to escape the application of the IR35 rules, a number of workers arranged their engagements through ‘managed service companies’, etc where the promoter is heavily involved in all the company management to the exclusion of the workers themselves. Such companies are subject to similar, but different, rules, which apply from 6 April 2007 for tax and 6 August 2007 for NICs.
For further information, see www.gov.uk/business-tax/ir35.
State pension age
Workers, both employed and self-employed, stop paying NICs once they reach state pension age. However, employers must continue to pay secondary Class 1 contributions in respect of earnings paid to employees who have reached state pension age.
The current state pension age for men is 65. The state pension age for women is gradually being increased so as to equalise it with that for men; it is being increased gradually from 6 April 2010 and will reach age 65 on 6 November 2018. From that date, the state pension age for both men and women will rise to 66 to achieve a state pension age of 66 on 6 September 2020. The state pension age will be further increased from 66 to 67 between 2026 and 2028. Provisions included in the Pensions Act 2014 provide for the state pension age to be reviewed every 5 years. In July 2017, following such a review, the government announced plans to bring forward the increase in the state pension age to 65 to between 2037 and 2039, rather than between 2044 and 2046 as under existing legislation.
Until November 2018, women will reach state pension age on the dates shown below, depending on their date of birth. The state pension age for women will be equalised with men from November 2018. Men will reach state pension age at age 65 until November 2018. The state pension age for both men and women will then increase from 65 to 66.
Date state pension |
||
Date of birth (women) |
age reached |
Pension age |
6 Oct. 1953 to 5 Nov. 1953 |
6 July 2018 |
64 yrs 8 mths-64 yrs 9 mths |
6 Nov. 1953 to 5 Dec. 1953 |
6 Nov. 2018 |
64 yrs 11 mths-65 yrs |
The state pension age for men born before 6 December 1953 is 65.
Men and women born between 6 December 1953 and 5 January 1954 will reach state pension age on 6 March 2018 (65 yrs 2 mths–65 yrs 3 mths).
Class 1 contributions
Primary Class 1 contributions are payable by employed earners and secondary Class 1 contributions are payable by self-employed workers by reference to their earnings.
Primary Class 1 National Insurance contributions are payable by employees on earnings that exceed the primary threshold (£162 per week for 2018/19) and by employers on earnings that exceed the secondary threshold (£162 per week for 2018/19). However, where the employee is under the age of 21 or an apprentice under the age of 25, employer contributions are only payable on earnings that exceed, respectively, the upper secondary threshold for under 21s or the apprentice upper secondary threshold. Both thresholds are aligned with the upper earnings limit for primary Class 1 contributions (£892 per week for 2018/19). Contributions are normally collected via the PAYE tax deduction machinery, and there are penalties for late submission of returns and for errors therein and also for PAYE and NICs paid late on more than one occasion in the tax year. Interest is charged automatically on PAYE and social security contributions paid late.
Employees’ liability to pay
Contributions are payable by any employee who is aged 16 years and over (even though they may still be at school) and who is paid an amount equal to, or exceeding, the primary earnings threshold (£162 per week for 2018/19). Where the employee has earnings between the lower earnings limit and the primary threshold, contributions are payable at a notional zero rate. This preserves the employee’s contributions record and entitlement to the state pension and contributory benefits. Nationality is irrelevant for contribution purposes and, subject to special rules covering employees not normally resident in Great Britain, Northern Ireland or the Isle of Man, or resident in EEA countries or those with which there are reciprocal agreements, contributions must be paid whether the employee concerned is a British subject or not provided he/she is gainfully employed in Great Britain.
Persons over state pension age are exempt from liability to pay primary contributions, even if they have not retired. However, the fact that an employee may be exempt from liability does not relieve an employer from liability to pay secondary contributions in respect of that employee.
Employees’ (primary) contributions
From 6 April 2018, the rate of employees’ contributions on earnings from the employee earnings threshold (£162 per week) to the upper earnings limit (£892 per week) is 12%. Contributions are payable at a rate of 2% on earnings above the upper earnings limit. Certain married women who made appropriate elections before 12 May 1977 may be entitled to pay a reduced rate of 5.85% on earnings between the primary threshold and upper earnings limit. However, they have no entitlement to benefits in respect of these contributions. Where a reduced rate election is in force, contributions are payable at the additional rate of 2% on earnings above the upper earnings limit.
Employers’ (secondary) contributions
All employers are liable to pay contributions on the gross earnings of employees above the age of 16 where their earnings exceed the secondary earnings threshold (£162 per week for 2018/19). However, where the employee is under 21 or an apprentice under the age of 25, employer contributions are only payable on earnings in excess of, respectively, the upper secondary threshold for under 21s or the apprentice upper secondary threshold (AUST). Both thresholds are set at £892 per week for 2018/19. As mentioned above, an employer’s liability is not reduced as a result of employees being exempted from contributions, or being liable to pay only the reduced rate (5.85%) of contributions.
For earnings paid on or after 6 April 2017, employers are liable at a rate of 13.8% on earnings paid above the secondary earnings threshold (or, where the employee is under 21). Most employers are entitled to an annual employment allowance, which is set at £3,000 for 2018/19 and which is offset against their secondary Class 1 liability. However, the allowance is not available to employers where the sole employee is a director. The allowance is claimed through the employer’s real time information (RTI) software.
The employer is responsible for the payment of both employees’ and employer’s contributions, but is entitled to deduct the employees’ contributions from the earnings on which they are calculated. Effectively, therefore, the employee suffers a deduction in respect of his or her social security contributions in arriving at his weekly or monthly wage or salary. Special rules apply to company directors and persons employed through agencies.
Items included in, or excluded from, earnings
Contributions are calculated on the basis of a person’s gross earnings from their employment.
Earnings include salary, wages, overtime pay, commissions, bonuses, holiday pay, payments made while the employee is sick or absent from work, payments to cover travel between home and office, and payments under the statutory sick pay, statutory maternity pay, statutory paternity pay and statutory adoption pay schemes.
However, certain payments, some of which may be regarded as taxable income for income tax purposes, are ignored for Class 1 purposes. These include:
• certain gratuities paid other than by the employer;
• redundancy payments and some payments in lieu of notice;
• certain payments in kind;
• reimbursement of specific expenses incurred in the carrying out of the employment;
• benefits given on an individual basis for personal reasons (e.g. birthday presents);
• compensation for loss of office.
BookletCWG2 (2016 edition) gives a list of items to include in or exclude from earnings for Class 1 contribution purposes (available from www.gov.uk). Some such items may, however, be liable to Class 1A (employer-only) contributions.
Class 1A and Class 1B contributions
Class 1A contributions are employer-only contributions payable in respect of most taxable benefits. All taxable benefits provided to employees regardless of the employee’s earnings rate are liable to Class 1A National Insurance contributions unless the benefit in question is within the charge to Class 1 or 1B or specifically exempt. Class 1A contributions are payable at a rate of 13.8%.
Class 1B contributions are payable by employers using PAYE Settlement Agreements in respect of small and/or irregular expense payments and benefits, etc. This rate is also 13.8%.
Rates of Class 1 contributions and earnings limits from 6 April 2018
Earnings per week |
Rates payable on earnings in each band |
|
Employee |
Employee |
|
£ |
% |
% |
Below 116.00 |
– |
– |
116.00–161.99 |
0** |
– |
162.00–891.99 |
12 |
13.8*** |
Over 892.00 |
2 |
13.8 |
** Contributions payable at a notional zero rate.
*** No employer contributions where employee is under 21 or an apprentice under 25.
Class 2 contributions
Class 2 contributions are payable at the weekly rate of £2.95 as from 6 April 2018. They are currently the mechanism by which the self-employed earn entitlement to the state pension and certain contributory benefits. They are payable annually with income tax and Class 4 contributions via the self-assessment system and are due by 3 January after the end of the tax year to which they relate. The liability is based on the number of weeks of self-employment in the tax year. Certain persons are exempt from Class 2 liability as follows:
• a person over state pension age;
• a person who has not attained the age of 16;
• a married woman or, in certain cases, a widow, either of whom elected prior to 12 May 1977 not to pay Class 2 contributions;
• persons with earnings below the small profits threshold (see below);
• persons not ordinarily self-employed (see below).
As part of the reform of National Insurance contributions for the self-employed, Class 2 contributions are to be abolished from April 2019 – one year later than originally planned. Class 4 contributions are to be reformed from the same date to provide for pension and benefit entitlement.
Small profits threshold
No liability to Class 2 contributions arises unless earnings from self-employment exceed the small profits threshold, which is set at £6,205 for 2018/19.
Persons not ordinarily self-employed
Part-time self-employed activities (including as a writer or artist) are disregarded for contribution purposes if the person concerned is not ordinarily employed in such activities and has a full-time job as an employee. There is no definition of ‘ordinarily employed’ for this purpose.
Payment of contributions
Class 2 contributions are payable via the self-assessment system with income tax and Class 4 contributions. Class 2 contributions for 2018/19 are due by 31 January 2020.
Class 3 and Class 3A contributions
Class 3 contributions are payable voluntarily. For 2018/19 they are payable at the weekly rate of £14.65 per week by persons aged 16 or over with a view to enabling them to qualify for a limited range of benefits if their contribution record is not otherwise sufficient. In general, Class 3 contributions can be paid by employees, the self-employed and the non-employed.
Broadly speaking, no more than 52 Class 3 contributions are payable for any one tax year, and contributions cannot be paid in respect of tax years after the one in which the individual concerned reaches state pension age. Class 3 contributions may be paid by monthly direct debit, quarterly bill or by annual cheque in arrears.
Class 3A contributions were introduced from October 2015, payable for a limited window, and provided those who reach state pension age before 6 April 2016 with an opportunity to top up their state pension. The Class 3A contribution ‘bought’ up to £25 per week of additional state pension. The amount of the Class 3A contribution depends on the contributor’s age and was payable by 5 April 2017.
Class 4 contributions
In addition to Class 2 contributions, self-employed persons are liable to pay Class 4 contributions. These are calculated at the rate of 9% on the amount of profits or gains chargeable to income tax which exceed the lower profits limit (£8,424 per annum for 2018/19) but which do not exceed the upper profits limit (£46,350 per annum for 2018/19). Profits above the upper profits limit attract a Class 4 charge at the rate of 2%. The income tax profit on which Class 4 contributions are calculated is after deducting capital allowances and losses, but before deducting personal tax allowances or retirement annuity or personal pension or stakeholder pension plan premiums.
Class 4 contributions currently produce no additional benefits. However, as part of the reforms to National Insurance contributions for the self-employed, Class 2 contributions are to be abolished from April 2019 (delayed from 6 April 2018) and Class 4 contributions are to be reformed from the same time to provide benefit entitlement. From 6 April 2019 onwards, the structure of Class 4 contributions will more closely resemble that of Class 1 contributions. A new limit – the small profits limit – will be introduced, which will be aligned with the lower earnings limit for Class 1 purposes. Class 4 contributions at a notional zero rate will be deemed to be paid on profits between the small profits limit and the lower profits limit.
Payment of contributions
In general, Class 4 contributions are self-assessed and paid to HMRC together with the income tax as a result of the self-assessment income tax return, and accordingly the contributions are due and payable at the same time as the income tax liability on the relevant profits. Under self-assessment, payments on account of Class 4 contributions are payable at the same time as interim payments of tax.
Class 4 exemptions
The following persons are exempt from Class 4 contributions:
• persons over state pension age at the start of the tax year (i.e. on 6 April);
• an individual not resident in the UK for income tax purposes in the year of assessment;
• persons whose earnings are not ‘immediately derived’ from carrying on a trade, profession or vocation;
• a person under 16 years old on 6 April of the year of assessment;
• persons not ordinarily self-employed.
Married persons, civil partners and partnerships
Under independent taxation, each spouse or civil partner is responsible for his or her own Class 4 liability.
In partnerships, each partner’s liability is calculated separately. If a partner also carries on another trade or profession, the profits of all such businesses are aggregated for the purposes of calculating their Class 4 liability.
When an assessment has become final and conclusive for the purposes of income tax, it is also final and conclusive for the purposes of calculating Class 4 liability.
Maximum contributions
There is a limit to the total liability for social security contributions payable by a person who is employed in more than one employment, or is also self-employed or a partner.
Where a person would otherwise pay more than the permitted maximum it may be possible to defer some contributions. The calculations are complex and guidance on the permitted maximum and deferment can be found on the GOV.UK website (see www.gov.uk/defer-self-employed-national-insurance).
Social security benefits
Benefits may be contributory (i.e. dependent upon set levels of social security contributions and/or NIC-able earnings arising in all or part of one or more tax years) or means-tested (i.e. subject to a full assessment of the income and capital of the claimant and their partner). Child benefit is one of a handful falling outside either category being neither contributory nor means-tested, although the high income child benefit tax charge claws back child benefit where anyone in the household has taxable income over £50,000 per annum. The benefit is clawed back at a rate of 1% for each £100 of income over £50,000 such that the tax is equal to the child benefit received where income is £60,000 or above.
Most benefits are administered by the Department for Work and Pensions and its agencies (such as Jobcentre Plus and The Pension Service). Some are administered wholly or partly by HMRC and the latter are marked with an asterisk in the following lists.
Universal Credit is replacing a number of benefits and is in the process of being phased in.
Further information
GOV.UK
For guidance on National Insurance.
DWP benefits
Tax Credits
www.gov.uk/browse/benefits/tax-credits
Child benefit
Statutory payments
For SSP, SMP, SPP, SAP and ShPP contact your employer in the first instance.
National Insurance Contributions & Employer Office, International Caseworker
Newcastle upon Tyne NE98 1ZZ
tel 0300 200 3506
For enquiries for individuals resident abroad.
Universal benefits
• Child Benefit*
• Carer’s Allowance (for those looking after a severely disabled person)
• Disability Living Allowance (DLA) – progressively being replaced by Personal Independence Payment (PIP)
• Personal Independence Payment (PIP) (help with some of the extra costs caused by long-term ill-health or disability for those aged 16–64)
Contributory benefits
• State Pension – basic and earnings-related
• Bereavement benefits
• Contribution-based Jobseeker’s Allowance (JSA) (time limited, i.e. unemployment)
• Contribution-based Employment and Support Allowance (ESA) (time limited for some, i.e. sickness and incapacity)
• Statutory Sick Pay* (SSP) (for employees only, paid by the employer)
• Statutory Maternity Pay* (SMP) (for employees only, paid by the employer)
• Maternity Allowance (for self-employed and others meeting the conditions)
• Statutory Paternity Pay* (SPP) (for employees only, paid by the employer)
• Shared Parental Pay* (ShPP) (for employees only, paid by the employer)
• Statutory Adoption Pay* (SAP) (for employees only, paid by the employer)
• Guardian’s Allowance*
• Income-based Jobseeker’s Allowance (JSA) (i.e. unemployment)
• Income-based Employment and Support Allowance (ESA) (i.e. sickness and incapacity)
• Income Support (low-income top up for those of working age, not working but neither unemployed nor sick/incapacitated)
• Working Tax Credits* (WTC) (low-income top up for those of working age)
• Child Tax Credit* (low-income top up for those of working age with children, in addition to Working Tax Credit if applicable)
• Disabled Person’s Tax Credits* (DPTC) (low-income top up for disabled people)
• Pension Credit (low-income top up for those of pension age)
• Social Fund grants (one-off assistance for low-income household with unexpected, emergency expenditure)
In addition, help with rent and rates is available on a means-tested basis from local authorities.
Many of the working age benefits are in the process of being replaced with ‘Universal Credit’, starting with new claimants. Universal Credit will eventually replace Income-based Jobseeker’s Allowance, Income-related Employment and Support Allowance, Income Support, Working Tax Credit, Child Tax Credit and Housing Benefit.
Peter Arrowsmith FCA is a former sole practitioner specialising in National Insurance matters, and member and former chairman of the Employment Taxes and National Insurance Committee of the Institute of Chartered Accountants in England and Wales. Sarah Bradford BA (Hons), ACA CTA (Fellow) is the director of Writetax Ltd and the author of National Insurance Contributions 2018/19 (and earlier editions) published by Bloomsbury Professional. She writes widely on tax and National Insurance contributions and provides tax consultancy services.