Being a writer can offer you freedom and creative control. However, smart tax planning can significantly increase your retained profits. This post discusses some key tax tips for authors and how you can maximise your profits, avoid surprise tax bills, and keep more of your earnings.
Overview - is it a hobby or a profession?
Establishing a career as a writer can potentially involve significant costs if you are conducting extensive research for your book. The ability to claim tax relied on these start-up costs can prove invaluable
It's possible to claim what is known as sideways loss relief. This relief enables you to claim tax relief by offsetting your trading losses against other income. However you'll need to demonstrate that you are operating commercially with the ultimate aim of eventually generating profits from your writing activities.
If you're unable to prove your writing activities are operating on a commercial basis then a claim for sideways loss relief will be denied by HMRC. Furthermore, HMRC are likely to consider your writing a hobby as was the case here and deny any sideways loss relief claims made subsequently.
Understanding the Averaging Rules to mitigate tax liabilities
As a writer you earnings can often fluctuate unevenly, some years may be far more lucrative than others. As a result, this this volatility can cause large, unexpected tax liabilities. Therefore, understanding HMRC’s Averaging Rules for creators of literary, dramatic, musical, or artistic works can prove highly beneficial.
The key points to mention are as follows:
Making a claim is only viable where profits are taxed at different rates of income tax. Additionally, where you have made a trading loss this is effectively treated as £nil profits when using the averaging calculation. The loss is still available to offset in the normal way - see sideways loss relief above.
You must make an averaging claim within one year of 31 January following the later of the two tax years to which the claim relates. Fox example an averaging claim for the 2023/24 and 2024/25 tax years must be submitted by 31 January 2027.
Winning Awards and prizes
These would usually be considered taxable by HMRC where these are awarded in your professional capacity as a writer. However an unexpected and unsolicited literary prize which is awarded in recognition of an outstanding achievement in a particular field, is not taxable.
Overseas income and Royalties
Royalties are taxable on a cash) basis and not an accrual basis as part of your trading profits. Although, as a general rule copyright royalties received by an individual other than the author are taxed as miscellaneous income.
In some cases, payment for work carried out abroad or from an overseas payer may be subject to foreign withholding taxes.
Therefore it's important to minimise any withholding taxes claim double tax relief against your UK tax liability. However when making any claim it's vital to review any double tax treaty the overseas territory has with the UK.
Tax deductible expenditure
Provided this is incurred wholly and exclusively in your writing profession then as a general rule most expenditure should be allowable.
However particular care should be taken where you are working away for periods. Your accommodation must be 'wholly and exclusively' incurred for the purposes of your trade to be allowable.
Therefore spending a summer abroad because the weather is better than the UK will have a dual purpose. As a result, it may be difficult to argue your accommodation travel is business related. Although you may be able to justify the expense if your creative work is based on or in the location you are staying.
Choice of business structure
Your business structure can determine your tax exposure. You can conduct your writing career as a sole trader, partnership, or limited company.
If you operate as a sole trader, administration is more straightforward, although you have less ability to shelter retained profits. Conversely, a limited company structure may offer lower tax rates and flexibility in withdrawing profits. However, more admin is involved and compliance is involved in running a limited company structure..
Understanding the VAT rules
The VAT treatment of your writing activities can depend on the format and where your buyers are located. As a general printed books remain zero-rated in the UK. Furthermore, E-books became zero-rated from May 2020.
However, direct sales to EU consumers may require registration under the One Stop Shop (OSS) scheme. Failing to understand these rules could lead to unexpected liabilities. Therefore, you should plan your distribution model with VAT consequences in mind.
Summary
By understanding these tax tips for authors, you can plan your finances strategically, and make the most of your writing career.
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.