This tax guide for authors and journalists has been prepared by HW Fisher & Company Ltd, Chartered Accountants. Please note that this information is provided for guidance only and does not purport to give professional advice.
Our Authors and Journalists Team, led by Barry Kernon and Andrew Subramaniam, specialises in tax advice for writers.
Further details can be obtained from:
Tel: +44 (0)20 7874 7875
Email: [email protected]
T +44 (0)20 7380 4947
E [email protected]
HW Fisher & Company Ltd
11-15 William Road
T +44 (0) 20 7388 7000
Self-assessment and the current year basis
– Time limits
Accounts preparation work for tax purposes
– Simple tax accounts
Professional expenses potentially allowable for tax purposes
What happens when you send in your tax return?
– Enquiries into your tax return
Value Added Tax – a short guide
Save tax by investing your money
– Other tax efficient investments
Basic tax information – to put you in the picture
This booklet will concentrate on two types of income relevant to authors and freelance journalists. The first type is income from an employment or office such as an employee of a newspaper. This type of income is known as ‘earnings from employment’, and is colloquially known as ‘Schedule E’ income.
The second type is income of self-employed people which is referred to as ‘trading income’.
It includes income from trades, professions and vocations. This type is known as ‘Schedule D’ income.
The scope for tax planning for authors and journalists with earnings from employment is much narrower than for those with income from self-employment, who are generally able to claim a wide range of expenses against their income and generally pay any tax due once or twice a year through the self-assessment system, rather than having tax deducted at source by their employer. Naturally HM Revenue & Customs (HMRC) is keen to categorise as many people as possible as employed rather than self-employed.
What happens about my tax and National Insurance if I’m employed? If you are employed, your employer is responsible for deducting income tax and National Insurance from your salary when you are paid through the PAYE (Pay As You Earn) system. The employer then pays it on a monthly basis to HMRC.
§ The amount of income tax deducted from your salary is calculated by using your PAYE Coding Notice, which adjusts the level of tax paid for any benefits you may receive, higher rate tax due on other income you receive, and any relief for deductions (e.g. making pension payments).
§ Class 1 National Insurance will be deducted from your salary at a rate of 11% in between thelower limit of £5,715 and the upper limit of £43,875 (from 6 April 2010). An additional 1% is payable on all profits above £43,875.
§ You can also pay a lower rate of 9.4% National Insurance if you have opted out of the State Second Pension previously SERPS (State Earnings Related Pension Scheme). This will mean you will only receive a basic state pension when you retire.
§ You may still be required to complete a tax return if you are a higher rate taxpayer, and any additional tax due will be payable on 31 January 2011, for the year ended 5 April 2010.
§ You can only claim expenses against your income that are wholly, exclusively and necessarily incurred in the duties of employment.
What happens about my tax and National Insurance if I’m self-employed?
If you are self-employed, you are responsible for your own tax and National Insurance. Even if you are paying Class 1 contributions as an employee, you may have to pay Class 2 and Class 4 contributions on self-employed income, subject to profit levels. This means:
§ Telling HMRC, if you haven’t already done so, that you are in business
§ Declaring all your income each year so that HMRC can assess the tax due. The tax office will send you a return for doing this
§ Paying the tax: for the first tax year in which you are in business you may not have to pay the tax on your profits until after the end of that year, but after that you normally pay it in two instalments on 31 January and 31 July of each year
§ Paying Class 2 National Insurance contributions as a self-employed person either by direct debit or by direct billing from National Insurance Contributions Office (NICO) – part of HMRC on a quarterly basis. The Class 2 rate is £2.40 per week. Small earnings exemption can be granted to self-employed people who have low earnings. (The threshold is £5,075 as of 6 April 2010). A penalty may be payable for late registration
§ The Class 4 contribution is levied at a rate of 8% for 2010/2011. The lower limit is £5,715 per annum from 6 April 2010. The upper limit is £43,875 as of 6 April 2010. An additional 1% is payable on all profits above £43,875.
Being self-employed also affects:
§ Your entitlement to social security benefits such as unemployment benefit
§ Other rights and duties, for example under employment protection legislation
§ Your liabilities to the public for the work you do.
You can find more information about self-employment in the booklet SE1 ‘Are You Thinking of Working for Yourself? which you can get free from any tax office or download from HMRC’s website – www.hmrc.gov.uk/leaflets/se1.pdf
Self-assessment and the current year basis
The self-assessment system has been with us since 1996/97 and is now well established. It consists essentially of two stages:
§ Firstly the completion of a tax return detailing all taxable income for the tax year and claiming appropriate allowances and reliefs, and
§ Calculating the tax payments required based on the details declared on the tax return. If a completed tax return is submitted by 31 October following the end of the tax year then HMRC will calculate the tax for you by the date the tax falls due for payment – 31 January.
It is now possible to complete and submit your tax return online and details can be found at www.online.hmrc.gov.uk
The income tax year runs from 6 April to 5 April the following year. So the tax year 2010/2011 is from 6 April 2010 to 5 April 2011. The income tax return which you should receive for that year is usually sent out in April.
The self-assessment tax return consists of six pages of standard information and there are supplementary pages for other income and gains. For example, there are other pages for employment and self-employment. A potential trap here is that it is the taxpayer’s responsibility to ensure he/she obtains and completes the correct supplementary pages, as appropriate.
Telephone HMRC’s Orderline (0845 9000 404) for any additional supplementary pages you require. Alternatively, download them from HMRC’s website at: www.hmrc.gov.uk/sa/forms/content.htm
Employees are generally taxable on earnings from employment received during the ‘current’ tax year.
Details of such income are shown on form P60 (if you are employed at the end of the tax year) or form P45 if you leave employment during the year. You may be paid expenses or provided with taxable benefits by your employer and these may be shown on a form P11D.
Self-employed people are also taxed on earnings in the current year, generally by the income shown in accounts that end in the current year. For example, 30 June 2009 year end is assessable for the year ended 5 April 2010.
There are strict time limits for the filing of tax returns with fixed penalties automatically enforced for failure to adhere to the relative due dates. Self-assessment will financially punish taxpayers whose accounts and tax returns fall into arrears.
‘Paper’ tax returns for 2009/2010 must be sumitted by 31 October 2010. Electronic tax return submissions may be made up to 31 January 2011. An outline of the penalty and interest procedure appears below:
§ Interest automatically charged on all overdue tax (currently 3% per annum calculated daily).
§ Automatic 5% surcharge on late payment of tax over 28 days after the normal payment date (usually 28 February following the tax year).
§ A second automatic 5% surcharge on tax paid over 6 months after the normal payment date.
§ Failure to deliver the tax return by the due date (usually 31 January) produces an automatic late filing penalty of £100, whether or not the tax is paid on time.
§ Daily fines can be levied for returns which are persistently late.
Simple record keeping
A number of people have asked us about the degree of thoroughness in record keeping that is required by HMRC under the system of self-assessment.
There are certain expenses which contain an element of private expenditure and which need apportioning before a claim is made. It is a long established practice that HMRC will accept claims for business use of telephone, motor running expenses and a room used as an office.
Whatever proportion of a particular expense is claimed for business purposes, it is best to keep all records, receipted accounts or invoices for a minimum period of five years and ten months following each tax year.
This includes telephone bills, receipts for motor repairs, servicing and insurance, and household bills for council tax, insurance, maintenance and repairs, and other expenses relating to the property as a whole.
It is unrealistic to expect taxpayers to log every telephone call and keep an exact record of business mileage, but what valid evidence there is of the amount claimed could be very useful. Logging telephone calls for a sample period, the same for business mileage, and evidence of journeys from a business diary could be very helpful indeed if there was a dispute about the amount claimed.
It will simply not be good enough to claim 70 per cent business mileage, for example, without some evidence. Rule of thumb percentage claims will be an open invitation for an HMRC investigation. The following points may be helpful.
1. 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, 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.
2. Use of home as office – Keep all receipts for home costs. The business proportion to be claimed is normally calculated by reference to the number of rooms. If you are to claim a specific percentage, one room needs to be set aside for exclusive business use. This can, however, give rise to a Capital Gains Tax liability when the property is sold, so care needs to be exercised. An estimate of the additional cost of lighting and heating can be used instead, based on the number of hours for which part of the property is used for business purposes.
3. Payments to spouses for assistance – The fee or salary must actually be paid from the business, and evidence of this should be retained. Annotating the bank statements would probably represent an acceptable record.
4. 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.
The Self-Assessment Return specifically asks if any estimates have been made in preparing accounts. The fear is that a positive answer will invite priority in HMRC’s enquiry schedule.
This may or may not be true but it is clearly essential to be able to justify any estimates made.
Difficulties can also arise in the recording of freelance income. For example, many people are reimbursed for expenditure they have incurred.
Reimbursed expenses represent income for the purposes of income tax and also for VAT. A full record has to be kept of these reimbursements and it is also necessary to keep copies of the expenses claims and, if possible, copies of the supporting invoices. In fact it is preferable to retain the original invoices and to pass on the photocopies, particularly for individuals who are registered for VAT, except in cases where the agreement with the client is different. Some companies require the original invoices for their own VAT purposes.
The expenses reimbursements have to be shown in the accounts as income and also as expenses where this is appropriate. However, in some cases the amount received is not equal to the amount that can be claimed, because of particular HMRC regulations. It is therefore all the more important that the records are as detailed as possible.
When HMRC investigates, they automatically ask to have all bank and building society lodgements identified. If any money received cannot positively be identified, the Revenue will tax it. This means that private items can be taxed unless a record has been kept. It is a good idea to retain a paying in book, detailing every lodgement, whether this represents income or not.
All in all, it is not possible to over-emphasise the importance of record keeping.
HMRC has produced an excellent booklet called ‘Thinking of Working For Yourself’ which includes details on the bookkeeping requirements for the purposes of self-assessment. Although this is for all types of business there is much in it that will be relevant to authors and freelance journalists and we would advise all newly self-employed people to read a copy. It can be obtained from HMRC’s offices or downloaded via the internet at www.hmrc.gov.uk/startingup/working-for-yourself.pdf
Accounts preparation work for tax purposes
As indicated earlier, all self-employed individuals must complete the self-employment pages in the return. Under self-assessment it is not necessary to send in copies of your accounts to HMRC. Instead, you have to disclose your income and expenses under pre-printed categories on the return (e.g. premises costs would include rent, business rates, water rates, lighting, heating, power and insurance for premises that were totally designated for 100% business use). There is also a column for entering disallowable expenses included in the grand total for an expense item (e.g. for premises costs, any non-business use of the premises would be disallowable).
Simple tax accounts
HMRC has simplified the accounting requirements for businesses, either full or part-time, where total business turnover before expenses is less than £68,000 per year. All you need to return in these circumstances is:
§ Your gross business turnover
§ Your total allowable deductions (business purchases and expenses and capital allowances)
§ Your net profit or loss.
Obviously it is essential to keep a detailed list of expenses and purchases for business purposes in case of a query from the tax inspector. Beware! HMRC seems to be targeting small businesses.
Professional expenses potentially allowable for tax purposes
The Taxes Act states that as a self-employed individual you are entitled to claim for expenses incurred “…wholly and exclusively… for the purpose of trade….”. The taxman will only allow expenses which come within this definition. Luckily this does cover most of the expenses you are likely to come across. You have to show the taxman that each of your expenses was “…wholly and exclusively for the purpose of trade” as an author or freelance journalist and he will be quite happy.
Let’s look at some of the more usual types of allowable expenses, although it must be pointed out that this is by no means an exhaustive list; you will probably think of dozens more along the same lines:
§ Use of home as office, or a charge for additional lighting and heating, office rental costs.
§ Agents’ fees and commissions.
§ Secretarial assistance.
§ Professional subscriptions.
§ Taxis, travelling and accommodation, subsistence in some cases.
§ Car running expenses.
§ Telephone, telemessages, messenger services, fax and broadband.
§ Printing, postage, stationery and photocopying.
§ Software, CD roms, internet charges.
§ Photographic expenses, illustrations and press cuttings.
§ Theatre, cinema and music tickets etc.
§ Television hire and licence, video recorder rental, satellite/cable costs.
§ Reference books, scripts, compact discs, tapes, professional journals and newspapers, DVDs.
§ Courses and conferences.
§ Bank charges and interest, hire purchase or leasing costs.
§ Accountancy fees, legal costs, bookkeeping.
§ Research assistance and materials.
§ Repairs and maintenance of equipment, also insurances.
§ Capital items used for professional purposes, e.g. TV set, car, computer, video tape recorder, mobile phones, office equipment and furniture. This type of expenditure qualifies for capital allowances.
§ Copies of own books for publicity.
There may be items not included in this list but which are nevertheless allowable. It is best to maintain a record of all expenses and seek advice if in doubt about what HMRC will accept. Remember that if your gross earnings (including expenses) reach £70,000 (from 1 April 2010) in any consecutive 12 months you must register for VAT.
These are really for “wear and tear” on “machinery and plant” which includes vehicles, reference library, office furniture, computers etc. These allowances can be a little confusing until you know your way around them, but they are important.
Capital Allowances: Plant and Machinery Allowance Regime;
Special Rate Pool
§ the main rate of writing down allowances (WDAs) is 20% (previously 25%);
§ the rate of WDAs on life-long assets is 10% (previously 6%);
§ an annual investment allowance (AIA) is available for the first £100,000 of expenditure (from 6 April 2010, previously £50,000) on most plant and machinery each year, giving a 100% allowance.
§ where more than £100,000 is spent in a chargeable period, the excess will qualify for WDAs in the normal manner.
§ any expenditure that qualifies for 100% allowances under separate schemes will be unaffected by the AIA; and
§ where unrelieved brought forward expenditure in the main pool is £1,000 or less, businesses can claim a WDA of any amount up to the balance of the pool
§ In addition, there is a 10% ‘special rate’ pool into which capital expenditure on the following assets will be allocated:
§ any unrelieved expenditure in a pre-FA 2008 long-life asset pool;
§ expenditure on the thermal insulation of a building (previously on such expenditure qualified for 25% allowances, but only when incurred on an industrial building); and
§ expenditure on certain ‘integral features.’ (Currently listed as electrical systems (including lighting systems); cold water systems; space or water heating systems, powered systems of ventilation, air cooling or air purification and any floor or ceiling comprised in such systems; lifts, escalators and moving walkways; external solar shading; and active facades.)
As for the main pool, where the unrelieved expenditure in the ‘special rate’ pool is £1,000 or less, businesses can claim a WDA on any amount up to £1,000.
The rates and allowances will change again from 6 April 2011. This is an intricate area of tax and we advise that you seek advice where necessary.
Capital Allowances: Motor cars
This is an area which has undergone significant changes recently and we advise that you seek professional advice where necessary.
Appealing against the taxman’s figures
With a system of self-assessment a general right to appeal against assessments is no longer necessary. Circumstances will arise, however, when appeals are required (e.g. when the selfassessment is amended by HMRC or a Discovery Assessment is issued). If you disagree with the taxman’s figures you have 30 days in which to appeal against them. (A late appeal will usually be accepted if there are reasonable grounds such as sickness or absence on holiday.)
What happens when you send in your tax return?
When you submit your tax return HMRC will “process” it. This means the figures shown on your tax return will be input into the self-assessment computer system. At this stage there will be checks made for obvious errors (such as the figures not adding up) but the return will not be looked at closely. If you have submitted the return before 31 October you will be sent a calculation of the tax due. If you have calculated the tax due yourself you will either receive confirmation that the return has been “processed without need for correction” or you will be sent a calculation indicating where the figures differ from yours.
Enquiries into your tax return
HMRC usually has 12 months from submission of the form to open a formal enquiry into your tax return. This is sometimes referred to as a ‘Section 9A’ enquiry. The time limit can be longer than 12 months if the return is submitted late. Most enquiries are opened because the inspector knows or suspects something is wrong with the return.
There are also a number of purely random enquiries each year. The tax inspector will never disclose whether the enquiry is random or whether he knows or suspects something. If the tax inspector opens a Section 9A enquiry he will usually write to you and your accountant, if you have one, setting out his concerns and asking a series of questions or requesting documentary evidence of entries on your return. Once the enquiry is complete the inspector will tell you that he wants some more tax, that nothing needs changing or, occasionally, that you have paid too much tax.
If more tax is due, interest will be charged and the inspector may also impose penalties, which can amount to 100% of the extra tax.
If, when looking at your return for a particular year, the tax inspector finds a serious error in your figures and feels that this may have occurred in previous years he is able to issue a ‘Discovery Assessment’ for earlier years even if the normal enquiry time limit has passed.
If you receive notice of a Section 9A enquiry and you do not have an accountant you should seriously consider appointing one who is experienced in this area. The professional costs in dealing with an enquiry from HMRC can quickly mount up. Many accountants can arrange insurance to cover such costs.
Averaging relief is a means of smoothing out the peaks and troughs of income over successive years. There can be a beneficial effect on payments on account, and it can also be valuable if high profits one year are preceded or followed by much lower profits.
By averaging, profits that would be taxed at 40% may be taxed at 20%. However, it is important to consider National Insurance implications too.
Value Added Tax – a short guide
It is not compulsory to register for VAT until your turnover i.e. money passing through your business as an author or freelance journalist, exceeds £70,000 a year (from 1 April 2010). 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.
The 2003 Finance Act introduced rules to relax and simplify the impact of VAT for small businesses. These concessions include a simplification of the calculations required so that VAT liability can be determined as a percentage of turnover, for businesses or individuals with an annual taxable turnover of less than £150,000 and an annual total turnover of less than £187,500.
This is known as the Flat Rate Scheme.
The VAT rate is increasing from 17.5% to 20% from 4 January 2011.
From 6 April 2008 the benefits from being domiciled outside the UK, while resident here, have been reduced considerably for most people. Apart from recent arrivals, only people with very substantial overseas income or gains, or those with overseas income of less than £2,000 per annum now benefit. We can offer advice as necessary.
Foreign tax credits
If you work abroad, you may be taxed on that income in both the UK and the country where it is earned. Therefore you will effectively be taxed twice on the same income. However, when you prepare your UK tax return, you can usually claim relief for some or all of the foreign tax suffered, depending on the rate at which you were taxed.
The treatment of the foreign tax is usually subject to the Double Tax Treaty the UK has in place with the country you were taxed in. Generally the tax treaties are such that your combined tax bill should be no more than the amount you would have to pay in the country where the higher tax is charged. If there is no treaty in place, then unilateral relief is available where the rule is that you can claim relief on the lower of the foreign tax suffered or the UK tax due on that income. In order to claim the Double Tax credit you must get a certificate of tax deducted.
Incorporating your trade into a company can be useful at saving tax, through the use of lower corporation tax rates and dividends. However, this generally depends on how much you earn, and again costs can eliminate some of the benefits. Once again, professional advice should be sought.
Married couple partnerships could also help to save tax, through making use of a spouse’s or civil partner’s personal allowance and basic rate band. However, HMRC may attack these partnership agreements if it feels that the profit share is not representative of the level of work done.
If your income is low it may be possible to claim Tax Credits to supplement your income. These are outside the scope of this booklet and further details can be found on HMRC’s website at www.hmrc.gov.uk/taxcredits
Save tax by investing your money
If you have earnings from self-employment (or employment if you do not contribute to a company scheme) you can use part of that income to make provision for your retirement. Within certain limits you will get full tax relief on your payments, which compares very favourably with other financial products where you get no tax relief. However, you will have to wait until you are at least fifty-five to get at the money…that’s the catch in it!
This is, however, an effective and tax efficient way of saving tax, particularly if you are paying tax at the higher rates.
Other tax efficient investments
There are other tax efficient investments such as Individual Savings Accounts (ISAs) and Insurance Bonds. If you want further information regarding these you should contact an Independent Financial Adviser, such as Fisher Family Office at our address.
Main personal allowances & tax rates for 2010/2011
This may change for those over 65 or with incomes over £100,000.
Tax rates on taxable income: (i.e. after allowances)
20% 0 – £37,400
40% £37,401 – £150,000
50% Over £150,000
Class 1 (employees)
11% £5,715 – £43,875
1% Over £43,875
Class 2 (self-employed)
£2.40 per week, unless taxable profits are below £5,075
Class 4 (self-employed)
8% on taxable profits between £5,715 and £43,875
1% Over £43,875
Taking care of tax – some useful tips
1 If you are just starting out, you must register with HMRC as self-employed as soon as possible, as a penalty may be charged.
2 Be honest with the taxman. It pays in the long run. Don’t think that you can fool them either; a high percentage of tax inspectors are top class university graduates.
3 When you write a letter to the taxman, keep a copy for future reference.
4 Get receipts for everything that you pay out.
5 If in doubt about any expenses or allowances – CLAIM THEM! Keep full details available for the taxman in case he asks.
6 Don’t ignore communications from the taxman. He won’t go away and can get quite persistent. It will only lead to estimates of your income being made, which always ends up with you paying excessive tax.
7 Don’t write nasty letters to the taxman, even if he’s made a mistake. It won’t get you anywhere. A polite letter receives far more sympathetic consideration.
8 In spite of all you’ve heard about tax inspectors, most of them are reasonable. They are there to ensure that you pay the correct amount of tax – no more and no less. They don’t get paid on a commission basis either!
9 It is important to put some money aside as you go along to cover your tax bills when they arrive.
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