In the UK Income tax is charged on “the profits of a trade, profession or vocation”.
You are assessed as trading and therefore must do a tax return if you exhibit one of the nine badges of trade. But do you know what these are? See the box below for an explanation.
First you need to note that a lot of tax law focuses on "the asset”. However there isn’t a lot of tax case law relating to artists - so what follows is my interpretation.
Please note that I’m NOT a tax accountant and if you need professional advice you should pay a professional!
For what it's worth, in the case of an artist I read “ the asset” as meaning either your stock of equipment and materials used to generate sales (which has a balance sheet value); or your stock of artwork (which has a balance sheet value) which is exhibited and sold over time via exhibitions, online, art fairs or wherever to generate an income.
The nine badges of 'trade'
One of the reasons why HMRC wants to know whether or not you are trading is because it needs to know what sort of tax to apply to your income.
For example, money you receive can be a taxable receipt that can arise in a number of ways. These are:
Below are the Nine Badges of Trade which HMRC have declared to be indications of trade - and my interpretation of how these apply to artists.
Please also remember that at the end of the day what matters is if you generated trading income or intended to trade - NOT how much profit you've made.
You’ll also get the chance to ask specific questions in the webinar and you don’t need a webcam or microphone to use this service.
My guess is the webinars are probably also suitable for more experienced people who want to check out they're doing the right thing! Or maybe just a refresher to remind you of anything you might have forgotten!
Record keeping for the self-employed - 27 September 2016 15:00 to 16:00
How to set up a record keeping system and what to record.
Find out about
Business expenses for the self-employed - 29 September 2016 11:00 to 12:00
This webinar covers
Capital Allowances for the self-employed - 30 September 2016 9:00 to 10:00
You can also follow the HMRC Twitter feed for HMRC Business Help @HMRCbusiness
My article in the September edition of The Artist magazine (in the UK) is all about how to Be business-like with expenses and tax.
It contains lots of brief tips about how to make your tax affairs easier to manage and avoid problems with the Inland Revenue. Headings include:
The tips are all one side of A4 making them very easy to file!
This edition is still on sale in all good newsagents in the UK but is also available as a back issue and is also available online as a digital subscription.
Did you know you can set up a budget account to spread your UK tax payments to HMRC?
Do you know how to budget for tax when your income as an artist is highly variable?
This post covers:
How to pay tax and NI to HMRC
Below is a video which highlights:
If you've always paid the same way you might find this very helpful and will change the way you make your payments.
The video is part of a series produced by HMRC to help people understand the different stages of the tax process.
Click Self Assessment Help and Deadlines to see the entire list of videos available
Budget for your tax bill
The main problem for a lot of artists is that their income can be very variable. That's why a lot of artists like to generate a steady income stream from something like teaching to reduce the stress of not knowing when and if you are going to earn income.
Three approaches I know are used by a number of artists to reduce stress about tax payments are as follows
1. Regular savings
Of course another way to set up a budget account is to pay a regular sum into a savings account each month - rather than an HMRC budget account!
You can opt to take a holiday from making a regular saving if you have an expensive month. However the principle is that you get used to putting money away to meet your tax bill on a regular basis. That is something that is especially important to do if your art business suddenly moves up a gear and you start making a lot more money from your art. You also need to change your habits in relation to how much you save!
You then pay your tax bill using the resources in the dedicated tax savings account.
That way you also get a moderate amount of interest on the balance as it accumulates.
2. Regular % top slice of all income received
If you generate enough income each year to pay tax then you will be left at the end of the year with a big lump sum to pay in one or two payments in January and July after the end of the tax year (i.e. 10 and 15 months after the end of the tax year).
This is a different approach to creating a savings fund for the tax payment.
What you do is take an automatic percentage based top slice from EACH receipt of a fee or payment for sales of your art. That is then set aside in a dedicated tax savings account.
It can take a bit of time to work out from payments received what the percentage should be that you deduct deduct for tax after you set aside for a figure for business expenses and your pension
These are the deductions you need to make before you arrive at the net income you actually get to enjoy or use for living expenses. If your income is variable it's very likely that the percentage may also vary with your gross and net income for the year. For example, if you start making a lot of money your taxable income could move into the top rate tax band and you then need to put aside more for tax.
One way of working it out is to look at past tax years and work out what percentage you would have needed to save to hit the target for the tax bill payments after the end of the tax year. If you're not too good with numbers you probably know somebody who can do this for you. Or you can ask and pay an accountant to advise you. However it's not rocket science.
Another approach is to see what would have happened if you had saved (say) 10% or 20% from every receipt - then see whether you need to increase or decrease from there.
3. Spread your tax bill across different tax years
One option for those who have highly irregular income streams (eg reliant on sales from solo shows) is to exercise your right as an artist to spread your income across tax years to smooth out the highs and lows.
The technical term for the option is "averaging". One of the conditions of claiming is it that your profits are wholly or mainly derived from literary, dramatic, musical or artistic works or designs. In other words it is a tax option solely designed for creative people.
This is the latest statement (April 2016) on HS234 Averaging for creators of literary or artistic works (2015).
Authors and artists who have fluctuating profits may pay a large amount of tax in a good year and little or no tax in a bad year. A relief, introduced in the March 2001 Budget, allows such people to average their profits for successive tax years. This can reduce their total tax bill for the 2 years concerned. The relief replaces previous reliefs for spreading of royalties and sums received for the sale of works of art. The same sort of people will benefit but this relief is simpler and more people will be able to claim.
If you want to take advantage of averaging you either need to read the tax advice on HMRC website VERY carefully and/or consult a tax adviser.
You can read more about Tax Tips for Artists on this websit
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Katherine Tyrrell writes about art, artists and the art business and has followers all over the world. She also delivers workshops for art organisations and reviews websites and career strategies for artists.
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