Barry Kernon is an expert in the tax treatment of individuals in the creative industries at HW Fisher & Company and Honorary Treasurer of the SoA. We asked him about new developments and authors’ most often asked questions.
Barry Kernon is an acknowledged expert in the tax treatment of individuals in the creative industries. As a consultant, he acts for a great many authors, journalists and others in the media world. He also advises many smaller businesses operating in a wide variety of sectors.
Barry is the Honorary Treasurer of The Society of Authors; a director and Honorary Treasurer of English PEN and of Privacy International, an enthusiastic volunteer for Tax Aid and a keen golfer who has naturally been persuaded to join the Finance Committee of his golf club. Barry is a cricket lover and pilates exponent.
What questions do you most get asked by SoA members phoning the tax helpline?
We are often asked about the types of expenses that can be claimed on the tax return. The subject of apportioning expenses between business and private use comes up frequently. Particular favourites are claims for use of home as office, travelling and accommodation, (including location research) car expenses, telephone and broadband.
We also get a lot of queries about how to calculate and claim capital allowances in relation to furniture, equipment and motor cars and on foreign tax issues including claiming relief for and minimising overseas tax deductions.
Was there anything in the latest Budget that authors specifically might need to know about?
Yes, several things could be important.
In future, credit for pension and benefit purposes will have to be claimed via self assessment. Authors will need to opt in. (Read more)
Another thing to be aware of is that banks will not deduct tax from interest payments and the first £1,000 of savings interest will be exempt from tax for basic rate taxpayers. (£500 for higher rate taxpayers).
Finally, the first £5,000 of UK company dividends will be taxed at the rate of 0%, which will be of interest to authors operating as a limited company and to those authors with share portfolios.
GLP cover is reasonable and the premium is extremely low. I would recommend it to any author.
There are changes coming in which will affect self-employed authors on low incomes? Can you explain?
From 2017/18, authors earning less than £1,000 in any given tax year will have no liability to tax. If their income exceeds £1,000, they will be able to deduct £1,000 as a notional expense allowance or to claim the actual expenses, if higher.
Do authors need to have an accountant?
No, but it can help. Most authors calling our helpline prepare their own tax returns and many use the HM Revenue and Customs software which has improved over the years and can cope with basic tax returns.
More complicated tax returns can benefit from an accountant’s advice in many ways, including exercising judgment on the allowability and extent of expenses to be claimed, quantifying income accurately, calculating capital allowances, preparing authors’ averaging claims, providing advice on tax, financial and national insurance planning. We provide a free initial consultation to any member of the SoA who is thinking of employing an accountant. Knowing that your tax return has been prepared correctly can be a great comfort.
The scheme provides cover for the cost of accountancy fees incurred in the course of a tax investigation. The cover is reasonable and the premium is extremely low. I would recommend it to any author.
We provide a free initial consultation to any member of the SoA who is thinking of employing an accountant.
What are your feelings about the proposed changes to tax returns which will mean more regular ‘updates’?
Under the new system, everyone will have a personal digital tax account if they are in self assessment. HM Revenue and Customs will ‘pre-populate’ each account with information they are made aware of such as salary, pension, bank interest received etc. Taxpayers will be able to add information whenever they wish.
There is a new requirement to submit information on a quarterly basis. This will have to be done digitally and HM Revenue and Customs have already indicated that Excel, the favourite of many, is not digital enough to be approved for use. We are therefore expecting a flood of new software products to be introduced, designed to deal with these digital submissions.
When VAT was originally introduced, there was a great deal of fear of the prospect of submitting quarterly returns, something new to everyone. However, people soon got used to it and many people still find it a useful discipline which helps keeps records up to date and gives a greater degree of control over the finances. I believe the same thing will happen with quarterly digital tax submissions. We will all soon be updating our Apps.
Does it matter if authors forget to tell their publishers if they are VAT-registered or a limited company?
It is important to notify the publishers of VAT registration as they should be adding VAT to royalty payments. Most publishers operate a self-billing system so, once they have the author’s VAT number, they can produce documentation that saves the author submitting a VAT invoice.
If an author’s copyright is in his/her name and has not been assigned in writing, the income arising should not be included in limited company accounts.
If a copyright is assigned in writing to a limited company, the publisher should be notified so that the payment can go into the correct account. It is likely that this notification would be done at the same time as the VAT position is dealt with.
Averaging helps authors with fluctuating incomes. How does authors averaging work?
Where authors are exploiting their own copyrights, licensing these to publishers, and their profits fluctuate from one year to the next, there is a system whereby the profits of adjoining years can be averaged together. This helps iron out wild fluctuations in earnings.
The figures for the two years are reworked, calculating amended tax and Class 4 national insurance liabilities. The figures are then totalled in order to establish the amount of the reduction. This reduction is then claimed on the tax return for the second of the two years covered by the averaging exercise.
The second year’s profits can be averaged with those of the following year, and so on.
Averaging cannot apply to the opening or closing years of the author’s professional activities.
Is it a good idea for authors to operate through limited companies?
Where authors channel income through limited companies, it is quite often possible to effect tax savings. National insurance liabilities can be reduced, profits can be distributed to family co-shareholders in the form of dividends, the rate of corporation tax is currently 20% which is much lower than the income tax rates, and profits can be accumulated within a type of ‘money box’. Companies are used to spread income over a number of tax years.
Authors using limited companies through which to channel their income must ensure that the company is entitled to receive the income in its own right. To do this, the publishing agreement must be between the company and the publisher. If the contract is in the author’s own name, and the income goes through the limited company, the resultant accounts could be misleading and open to attack by HM Revenue and Customs.
At the same time care is needed when assigning copyright or novating or transferring an authorship contract into the name of a company because this transaction is deemed to be done at market value where the copyright has been created since 31 March 2002.
This is a complicated area and professional advice should be sought in order to avoid incurring unnecessary tax liabilities.
If you have questions about tax, don’t fear! Members of the SoA can use our free Tax Helpline – manned by Barry and his colleagues at HW Fisher.