Tuesday, January 28, 2014

Ten More Tax Tips for Artists

Round about this time of year - just as I'm submitting my tax return to Her Majesty's Revenue & Customs, I write a blog post about tax - for artists.

Last year it was Ten Tax Tips for Artists.

Two tax collectors (1540s) by Marinus van Reymerswaele
This year I've come up with ten more tips about tax for artists.
  1. Get your submission in on time and avoid financial penalties
  2. Pay your tax on time
  3. Make sure you have funds available to pay the tax due
  4. Set up a savings account for funds set aside for tax
  5. Keep a clear distinction in your files for different years
  6. Have a summary worksheet page for your tax workbook
  7. Keep a note of the exchange rate you use for international income and expenses
  8. Only claim 100% of an expense if it is 100% a business expense
  9. Don't forget to make a note of all the business journeys you make
  10. A UTR is essential for all short-term contracts

So - if you're interested - read on and find out more.


1. Get your submission in on time and avoid financial penalties


Financial penalties for late submission can be steep.  This link - Tax return deadlines and penalties -  and the table below provides information about the penalty system relating to late submissions in the UK.  You've got 10 months after the end of the tax year to get your tax return in.

Length of delay
Penalty you will have to pay
1 day late
A penalty of £100. This applies even if you have no tax to pay or have paid the tax you owe.
3 months late
£10 for each following day - up to a 90 day maximum of £900. This is as well as the fixed penalty above.
6 months late
£300 or 5% of the tax due, whichever is the higher. This is as well as the penalties above.
12 months late £300 or 5% of the tax due, whichever is the higher.
In serious cases you may be asked to pay up to 100% of the tax due instead. In some cases the penalties can be even higher than this.
These are as well as the penalties above.

This is the HMRC's list of reasonable excuses for filing lateWhat counts as a reasonable excuse for filing an online return late?.  One year I had to use the first one - but they did know that the system was completely overstretched with people bombarding them with last minute returns!
Generally, a 'reasonable excuse' is when some unforeseeable or unusual event beyond your control has prevented you from filing your return on time. For example:
  • a failure in the HMRC computer system
  • your computer breaks down just before or during the preparation of your online return
  • a serious illness, disability or serious mental health condition has made you incapable of filing your tax return
  • you registered for HMRC Online Services but didn't get your Activation Code in time

2.  Pay your tax on time


The other reason you can get a financial penalty is if you fail to pay your tax on time.

This the HMRC statement of Interest and penalties if you don't pay your tax on time
Length of delayPenalty you will have to pay
30 days late5% of the tax you owe at that date
6 months late5% of the tax you owe at that date. This is as well as the 5% above.
12 months late5% of the tax unpaid at that date. This as well as the two 5% penalties above

3. Make sure you have funds available to pay the tax due


This involves two things:
  • making sure you put funds aside every time you receive income 
  • making sure those funds can be accessed easily to facilitate payment. 
You need to work out what's a reasonable percentage of funds to set aside for tax. This depends on:
  • level of projected income
  • tax allowances you are eligible for - which reduce the sum of income on which tax is due
  • relevant business expenditure which will offset tax due
This is complicated if you also receive funds from other sources (eg a salary of pension) where PAYE assumes use of the whole of the personal allowance when deducting tax

A useful "rule of thumb" used by many is to use the marginal rate of tax as a proxy for the sum due. Thus in the UK if you make £10,000 net profit assume you need to pay 20% ie £2,000 as tax.

4. Set up a savings account for funds set aside for tax


If you've got to put money on one side you might as well earn interest on it!  Just make sure you've drawn down in good time and transferred into the account you make payments from in good time.

5. Keep a clear distinction in your files for different tax years. 


I've always got two tax files on the go.
  • One for the current tax year and 
  • one for the tax year just gone where I've yet to complete the tax return. 
  • (once I've completed the return for the last tax year I then set up the folder for the next tax year!)
It's just so easy to put the paperwork in the wrong file.  Which is why I use colour coded folders with very big labels!

6. Have a summary worksheet page for your tax workbook


I use Excel for my accounts.  I like to keep the big picture really simple.  For example, I
  • break out each element of income into different worksheets (within the workbook) and have one clear statement for each.  
  • pick up the total gross income from each particular aspect of income and insert it into a cell on a summary sheet.
It's then much easier to compare years to see how income has been changing year on year.=+'name of worksheet'!cellreference (i.e. Column Letter Row number eg F14)

To pick up a total in Excel
  • place your cursor on the cell you want to transfer the summary total to (on the summary worksheet)
  • enter '+'
  • now move your cursor to the cell where the total is on another worksheet - and hit return
  • the total will be copied to the cell in the summary page where you clicked +

7. Keep a note of the exchange rate you use for international income and expenses


I use xe (http://www.xe.com) - a foreign exchange site - to provide proxy currency exchange rates for the date income became due or expenditure made (in e.g. PayPal) in another currency.

The exchange rate you need to use is the one which relates to when the invoice was sent or the payment was due.  It's not the exchange rate which applied when you transferred money to or from your own personal bank account. Any profit or loss you made on changes in the exchange rate are not necessarily anything to do with your business figures (eg if you leave money sitting in a PayPal account and only draw down twice a year)

Doing the accounting for currency gains and losses due to changes in the exchange rate is really complicated and you really don't want to go there unless you really have to - in which case employ an accountant!

8. Only claim 100% of an expense if it is 100% a business expense

The tax man tends to take a very dim view of those who claim personal expenses as business expenses.  It's not a good idea.

On the other hand, many tax regimes understand that some expenses relate both to home and business.  A good example would be bills for heat and light.  You can prorate bills so long as you have reasonable grounds for the percentage you use.

Plucking a figure out of the air does not impress the taxman.

So, for example, find your utility bills.
  • A studio in the garden with separate meters would rate as 100% if you can persuade the tax man you're a serious painter - with sales.
  • If you need to prorate utility bills you need to know:
    • The area of your home - and the area of your studio and work out what percentage the latter is in relation to the former
    • the frequency your studio was lit and heated relative to the rest of the home.

9. Don't forget to make a note of all the business journeys you make


The item of expense I often forget to note down properly are all those journeys with a business purpose.
  • Keep a note the purpose  of journeys
  • claim actual cost if public transport
  • claim HMRC approved mileage rate for all journeys by car.

Approved mileage rates

From 2011-12 First 10,000 business miles in the tax year Each business mile over 10,000 in the tax year
Cars and vans 45p 25p
Motor cycles 24p 24p
Bicycles 20p 20p

10.  A UTR is essential for all short-term contracts


Many artists supplement their income from sales of their artwork with long or short terms contracts for other art-related work eg teaching adult education.

However organisations in the UK MUST obtain two things from any employee. These are:
  • a Unique Taxpayer Reference or UTR (the self-employment reference number formerly known as 'schedule D') and 
  • a National Insurance (NI) number. Without these numbers it is impossible now to bid or apply for any short-term paid opportunity.
Hence if you want to make money you must register with HMRC for self-employment taxation and national insurance purposes.

and finally......


There's the question of eligible business expenses - which we'll look at tomorrow.

Note: I'm not offering this as "proper professional advice" as I've retired from my professional life (who knew I qualified as an accountant?) and no longer pay a subscription to my professional institute or professional indemnity insurance. If your affairs are complicated and you need professional advice, you need to find somebody who has current expertise.

2 comments:

Tina Mammoser said...

Can you clarify on #10? If it is contract work, done as a self-employed contractor, I have never needed to supply a UTR or NI number. I invoice them for the work, they pay the invoice. I've only had to supply these things for 'employee' categorized work.

Katherine Tyrrell said...

I think you'll find it's part of an increased drive to eliminate the black economy and things like money laundering.

For example, one of the things my publisher asked me about at our initial meeting was whether I had a UTR for payment purposes.

In part it will depend on what sort of entity an organisation is dealing with e.g. a self-employed trader (UTR required); a limited company (company number required); a charity (charity number required) etc

In the past, extra checks on payments to individuals used to be limited to people working in the building trade where it was known that there was widespread bad practice leading to the avoidance of tax.

So far as I am aware HMRC is tasked with cracking down on all the potential loopholes which involve somebody being paid for a job without any sort of reference to a audit trail between two taxable entities - the one receiving the goods or services and the one supplying them.

A Unique Tax Reference Code (UTR) is just one way of making it easier for HMRC to track whether everybody is declaring all their income.

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