Does your art create a second income?

Do you make a second income from your art? ​

As well as knowing what you can claim against tax, it's important to know what you need to declare. 

​Even if your art sales are a second income, by trying to sell only for cash and to not declare anything, it can backfire on you in the long run.
a comment on a previous site I ran

Do you know that Her Majesty's Revenue & Customs (HMRC) in the UK are trying to recover more tax from those with second incomes?  

Other tax authorities in other countries are also trying to do the same thing.

In particular, they're very interested in "the black economy" - i.e. those that don't declare that income for tax purposes (a.k.a. ​​tax evasion)

business activity and income that people do not record in order to avoid paying tax on it

business activity that is illegal because tax on profits is not paid to the government 
​
Definitions of the 'black economy' | Cambridge Dictionary

There are lots of websites highlighting how you can use your talents and skills to make a second income.

However very few tell you about the tax implications of a second income.

Bottom line - if you get found out, the result can be very significant punitive fines and possibly a criminal record..

On the other hand, some tax authorities realise that the right tax might not get paid at the right time by the people who need to - because not everybody understands the system. They want to make it possible for people with unpaid tax to remedy mistakes before the taxman contacts you.

AN EXAMPLE OF CONFUSION

Some people believe that it's possible to earn a certain amount of additional income before you need to declare it for tax purposes.
BUT:

• They assume that their annual personal tax allowance is equivalent to permission NOT to declare earned income up to that sum (e.g. see Tax charges on a second income)
• They do not know that an individual's personal allowance is built in to the tax code/rate used by your employer to tax your main source of income - and is not available to offset second incomes.
• They are unaware that all second income attracts the highest rate of tax used for your total income.

A second income from your art
​

Lots of non-professional artists make a second income from their art from their art. Not so many remember to check out what that means for how they need to pay tax on that income.

This post provides a summary of

• some of the things you need to know about taxation on second incomes (but it is NOT professional/legal advice and I owe you no liability in respect of what is set out below.)
• what you must do to declare any unreported tax liabilities (in the UK)

make sure you declare everything you should add - and do your sums correctly

What is a second income?
​

The type of activities that tend to generate a second income - in general - as described by HMRC are set out below.

I've also included some hypothetical EXAMPLES of what such activities might be identified and categorised for artists

• fees from consultancy or other 'expert' services such as public speaking or providing training - EXAMPLE: lectures to art schools, art classes at home (or elsewhere; individual personal tuition delivered to various students)
• payment for organising parties and events or providing entertainment (EXAMPLE: organising painting parties / painting holidays for people who are not close friends)
• income from activities such as taxi driving, hairdressing, providing fitness training or landscape gardening (EXAMPLE: painting commissions to order)
• profits from spare time activities such as making and selling craft items  (EXAMPLE: selling artwork online.)
• profits from buying and selling goods, for example regular market stalls, boot sales etc  (EXAMPLE: selling art or crafts on a regular basis at various local / regional art fair or market)

To get clarification of how HMRC will treat you, it's a good idea to reference two other posts

• Income Tax: The nine badges of trade ​(January 2017) - what specific tests HMRC use to differentiate between artists who are trading and hobby artists who make a little bit of hobby income
• ​The bonus if you're selling art - but not a lot! (April 2018) - about the hobby income allowance - which allows hobby artists to can earn small sums and not pay tax (so long as they keep proper records).  The tax free allowance is also available to those earning more than £1,000 - so long as they don't reduce their tax bill by claiming expenses and offsetting these against their turnover.

• ​If your annual gross trading or property income, from one or more trades or businesses is more than £1,000 you can use the tax-free allowances, instead of deducting any expenses or other allowances.

​HMRC and second incomes
​

It does not matter why your tax affairs are wrong, it’s better to come to HMRC and admit any failures or inaccuracies rather than wait until we contact you
How to make a voluntary disclosure to the HMRC (updated January 19th 2019)

In 2014, the HMRC ran a campaign relating to second incomes which took the approach that most people want to pay the right tax - but sometimes they just find the whole process rather confusing. It offered people the opportunity to disclose their situation in relation to any unpaid tax. The campaign finished in 2017.

Now that campaign has come to an end, the approach continues to be supportive rather than punitive in the first instance - but ONLY for those who make a formal disclosure.

HMRC believes that its customers want to pay the right amount of tax and wants to help those that are not paying the right amount to put that right.
The DDS gives individuals and companies a chance to bring their affairs up to date in a simple, straightforward way.
​How to make a voluntary disclosure to the HMRC (updated January 19th 2019)

They provide a methodology for online digital disclosure of any underpaid tax.  

• See Guidance: How to make a voluntary disclosure to HMRC for how this works
• This contains a lot of detail I'm not going to attempt to cover here.

The criteria for an individual to take part in this disclosure facility are as follows:

• UK resident
• Employed
• Have an untaxed source of additional income

This might relate to, for example,

• either a business that has not declared all of its income  
• or a business that’s trading and has not registered with HMRC for one or more taxes.​

Companies and other organisations (including clubs, societies, associations and other unincorporated bodies) need to determine the amount of Corporation Tax to disclose on the understated profit arising from this undeclared income

In broad terms, what you need to do is:

• work out the number of years that you need to disclose  - based on your understanding of when you should have told HMRC about getting this income or gain.
• Get your records together - so far as you are able
• get your accounts sorted and then complete an online form.
• Individuals and companies can notify by completing the DDS form.
• You then have 90 days from your disclosure to get all the paperwork sorted and the funds ready to pay the unpaid tax and the fines. (You may be able to arrive at an agreement re repayment of back tax owed - but this will also cost you)
• There is a  calculator to work out interest and penalties that are due on tax liability for up to the previous 19 years.​

​

Why it's much better to disclose than be found out
​

I guarantee you really do NOT want to be found out if you are evading tax for two reasons:

• ​it'll be much more expensive in terms of the penalties charged for unpaid tax - basically you could pay up to twice the tax owed if you get found out.
• you might end up with a criminal record - for evading tax - and a report of how you were sentenced in the local newspaper.

HMRC is targeting tax evasion and we’ll use information we hold to identify customers who have not declared all their income.

If you owe additional taxes we’ll usually charge higher penalties than those we charge if you come forward. The penalties could be up to 100% of the unpaid liabilities, or up to 200% for offshore related income.

In serious cases we may consider starting a criminal investigation, in line with our criminal investigation policy.
How to make a voluntary disclosure to the HMRC (updated January 19th 2019)

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​Outside the UK
​

I've used the UK and HMRC examples in this blog post. However I guarantee the principles will be the same in most developed countries

The reason is that:

• there have been significant changes in economic sectors and activity over the last 30-40 years. A lot has gone "underground" or become ostensibly invisible (for now).
• plus changes in how people generate cash they earn

This leads to most taxation authorities working to a general imperative to recoup the income from taxation that they are losing out on due to

• the enormous size of the black economy and
• income earned being unrecorded and not declared for tax purposes. 

One day they may well catch up with you - and the later it happens the more expensive it will be for your wallet and reputation.

Below are the links to 

• UK: Tax for Artists - including links to formal advice from HM Revenue & Customs in the UK
• USA: Tax for Artists - including links to formal advice from the IRS in the USA.
• Ireland: Tax for Artists - including links to the Revenue Commissioners
• Australia: Tax for Artists ​- including relevant links to the Australian taxation Office