1. What is a professional author for tax purposes?
For tax purposes, all authors are professional authors while they are writing regularly with a view to, or with the intention of, making a profit; or while they are gathering material, researching or otherwise taking steps which will lead to the publication of a book. Very few authors ever cease to be authors and many begin to be authors long before a book is published.
If the Inland Revenue should argue that because an author is writing as a sideline, he/she is not a professional author, this argument can usually be refuted.
2. Under what provisions of the Income Tax Acts is the income of an author taxed?
A professional author is taxed under Case II of Schedule D of the Income and Corporation Taxes Act of 1988. His/her taxable income is the amount receivable, either directly or by an agent on his/her behalf, less expenses wholly and exclusively laid out for the purposes of the profession. If expenses exceed income, the loss can either be carried forward and set against future authorship income or set against other income which is subject to tax in the same year or the previous year. If tax has been paid on that other income, a repayment can be obtained, or the sum can be set off against other tax liabilities. Special loss relief can apply in the opening year of the profession. Losses made in the first four years can be set against income of up to three earlier years.
If a writer only receives very occasional payments for articles or books, it may not be possible to argue successfully that these are profits arising from carrying on a continuing profession. In such circumstances these 'isolated transactions' may be assessed under Case VI of Schedule D of the 1988 Act. Only expenses directly incurred are likely to be deductible in arriving at the taxable income, and if expenses exceed income, the loss can only be set against the profits from future isolated transactions, or other income assessable under Case VI.
3. What expenses can an author claim?
An author can normally claim the expenses listed below. Note that it is strongly advisable to keep detailed records. Diary entries of appointments and notes of fares are much more convincing to the Inland Revenue than round figure estimates. Obtain and retain receipted bills wherever possible.
(i) Secretarial, typing, proof-reading, research. Where payments for these are made to the author's spouse, they should be recorded and entered in the spouse's tax return as earned income which is subject to the usual personal allowances.
(ii) Telephone, postage, stationery, printing, maintenance and insurance of typewriter, computer, software, dictation tapes, batteries, office requisites and other equipment used for the profession. See also (xi).
(iii) Periodicals, books (including presentation copies and reference books) and other publications necessary for the profession — but amounts received trom the sale of books should be deducted.
(iv) Hotels, fares, car running expenses (including repairs, petrol, oil, garaging, parking, cleaning, insurance, road fund tax, depreciation), hire of cars or taxis, in connection with
(a) business discussions with agents, publishers, co-authors, collaborators, researchers, illustrators, etc.
(b) travel at home and abroad to collect background material.
In some cases a mileage allowance can be claimed instead of the actual car costs and depreciation.
(v) Publishing and advertising expenses, including charges for proof corrections, indexing, photographs, etc.
(vi) Subscriptions to societies and associations, press cutting agencies, etc. incurred wholly for the purpose of the profession.
(vii) Premiums to pension schemes such as the Society of Authors Retirement Benefits Scheme. For contributors under 36 at the beginning of the tax year, the maximum premium is now 17.5% of net earned income. Higher limits apply for those who are 36 and over, on a sliding scale of up to 40% for persons aged 61 and
(viii) Rent, business rates, council tax, lighting, water, cleaning, etc., the proportion being determined by the ratio which the number of rooms used exclusively for the profession bears to the total number of rooms in the residence. In practice, authors usually claim that their use is non-exclusive and restrict their claim to a proportion of their home expenses (e.g. extra lighting, heating, cleaning and council tax) so that no Capital Gains Tax liability arises.
Note: the exemption from Capital Gains Tax which applies to an individual's main residence does not apply to any part of that residence which is used exclusively tor business purposes. The effect of this is that the appropriate proportion of any increase in value of the residence since 31/3/82 can be taxed, when the residence is sold, at the maximum rate of 40% (at present).
Authors who own their houses should bear this in mind before claiming expenses for the use of a room for writing purposes. Arguments in favour of making such claims are that they afford some relief now, and that where a new house is bought in place of the old one, the gain made on the sale of the first study may be set off against the cost of the study in the new house, thus postponing the tax payment until the final sale. For this relief to apply, each house must have a study, and the author must continue his/her profession throughout. On death, capital gains are not taxed, but Inheritance Tax may apply.
(ix) Accountancy charges and legal charges incurred wholly in the course of the profession including the cost of defending libel actions, damages (insofar as they are not covered by insurance) and libel insurance premiums. However \vhere, in a libel case, damages are awarded to punish the author for having acted maliciously, the action becomes quasi criminal and costs and damages may not be allowed.
(x) TV and video rental (which may be apportioned for private use), and cinema or theatre tickets, if wholly for the purpose of the profession, e.g. playwriting.
(xi) Capital allowances can be claimed for business equipment (but may have to be reduced to exclude personal - non-professional - use where necessary):
(a) on computer equipment and accessories: the allowance is 40% in the first year (100% for computer and certain other hi-tech equipment until 31st March 2003), and 25% of the reduced balance in each successive year;
(b) on cars: 25% in the year of purchase and then 25% of the reducing balance each year (but not more than �3,000 per year);
(c) for all other business equipment, e.g. TV, radio, tape and video recorders, office furniture, photographic equipment, etc: 40% in the first year and then 25% of the reducing balance.
4. What is the 'current year' basis of assessment?
Authors are taxed on the net profit shown for the accounting period ending in the year of asssessment - for example the profit for the year ended 31st December 2001 is taxed for 2001/02. In years prior to 1997/98 the system was different.
Anyone who is just starting to write for profit should take professional advice about what date to choose for their accounting year end.
Self-assessment was introduced with effect from 1996/97. Accounts need to be prepared in standard format acceptable at face value. There are heavy penalties if errors are discovered or strict time limits over-run. The keeping of accurate records of income and expenses is now more essential than ever as their absence can also attract penalties. Records must be kept for 6 years.The Inland Revenue publishes a booklet Self-Assessment, sub-titled a guide to keeping records for the self-employed.
5. Can an author average-out his/her income over a number of years for tax purposes?
From 6th April 2000 onwards an author may average earnings over two consecutive tax years when the net profit in one year is 75% or less than that of the other year. The time limit for claims is 12 months following 31st January after the second year of the period.
For the tax year 2000/01 and earlier years it was possible (under Section 534 of the 1988 Act) to spread certain earnings back over a period of up to three tax years. It is also possible to average out income within the terms of publishers' contracts (e.g. by dividing the payment of the advance advantageously), but professional advice should be taken before signature. When a husband and wife collaborate as writers, advice should be taken as to whether a formal partnership should be made or whether the publishing agreement should be in joint names.
6. Is a lump sum paid for an outright sale of copyright exempt from tax?
No. If an author is resident in this country, all the money he/she receives from the marketing of his/her literary work, by whatever means, is taxable.
7. Is there any relief where old copyrights are sold?
On sales before 5th April 2001, Section 535 of the Income and Corporation Taxes Act 1988 gave relief 'where not less than ten years after the first publication of the work the author of a literary, dramatic, musical or artistic work assigns the copyright therein wholly or partially, or grants any interest in the copyright by licence, and -
'(i) the consideration for the assignment or grant consists wholly or partially of a lump sum payment the whole amount of which would, but for this section, be included in computing the amount of his profits or gains for a single year of assessment, and
'(ii) the copyright or interest is not assigned or granted for a period of less than two years.'In such cases, the amount received may be spread forward in equal yearly instalments for a maximum of six years, or, where the copyright or interest is assigned or granted for a period of less than six years, for the number of whole years in that period. A 'lump sum payment' is denned to include a non-returnable advance on account of royalties.
It should be noted that a claim may not be made under this section if a prior claim has been made under section 534 of the 1988 Act (see paragraph 5, of this Guide) and vice versa.
8. Are royalties payable on publication of a book abroad subject both to foreign and UK tax?
The UK has Double Taxation Agreements with most developed countries. After completion of certain formalities no tax is deductible at source by the foreign payer, but income is taxable in the UK in the ordinary way. Some countries impose certain extra taxes (e.g. culture taxes) which are unavoidable.
Where there is no Double Taxation Agreement, credit will be given against UK tax for overseas tax paid. A complete list of countries with which the UK has conventions for the avoidance of double taxation may be obtained from H M Inspector of Taxes FICO, Fitz Roy House, P O Box 46, Nottingham NG2 1BD.
It is the duty of the taxpayer to minimise overseas tax deductions, and the Inland Revenue may deny relief if this is not done. If earnings are kept overseas in foreign currencies they still need to be declared in most cases in the United Kingdom. If they are not repatriated it is necessary to convert into sterling at the average exchange rate published by the Inland Revenue. This can be obtained by telephoning 020 7438 7700.
9. Residence abroad?
This pamphlet is intended to explain briefly the tax situation of authors resident in the United Kingdom. Authors residing abroad will, of course, be subject to the tax laws in their country of residence, and as a general rule royalty income paid in the United Kingdom can be exempted from deduction of UK tax at source, provided that the author is carrying on his/her profession abroad. An author who is intending to go and live abroad should make early application for future royalties to be paid without deduction of tax to H M Inspector of Taxes FICO, Fitz Roy House, P O Box 46, Nottingham NG2 1BD. In certain circumstances authors resident in the Irish Republic are exempt from Irish Income Tax on their authorship earnings.
10. Are grants or prizes taxable?
Certain Arts Council grants (but not Literature Awards and Bursaries) are deemed to be taxable, whereas most prizes and awards are not, though it depends on the conditions in each case. When submitting a statement of income and expenses, such items should be excluded, but reference should be made to them in a covering letter to the Inspector of Taxes. Members are welcome to consult the Society for further guidance.
11. What about the sale of manuscripts?
Following the decision in a case which was backed by the Society, proceeds from the sale of manuscripts, notebooks and working papers are likely to be liable to Income Tax (being receipts of the profession) rather than Capital Gains Tax. Depending on the circumstances, money from the sale of letters may well be subject to Capital Gains Tax (if any).
12. What is the item 'Class 4 N.I.C.' which appears in my tax computation?
All taxpayers who are self-employed pay an additional national insurance contribution if their earned income exceeds a figure which is varied each year. This contribution is described as Class 4 and is calculated in the tax assessment. It is additional to the self-employed Class 2 flat rate contribution but confers no additional benefits. It applies to those who are under their pensionable age.
13. Can the Society recommend any tax 'dodges'?
No, it can't. But it can recommend members to bear in mind that, while it is an offence for a tax-payer to evade payment of tax,'every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be'.
Anyone wondering how best to 'order his affairs' for tax purposes, should consult an accountant with specialised knowledge in this field. The Society can recommend a number of reliable firms. Experience shows that a good accountant is well worth his/her fee which, incidentally, so far as it relates to matters other than personal tax work, is an allowable expense.
Revised by Kernon & Co Accountants
Revised Edition � The Society of Authors 2002
Free to members, �2 per copy post free to non-members.
The Society of Authors, 84 Dray ton Gardens, London SW10 9SB
Note: these Quick Guides are intended to give an outline of the subject as at the date of publication. Revisions are issued as necessary. Specific enquiries should be addressed to the Society
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