I'm just finishing up my tax return (due 31st January 2013) and I'm just reflecting on
- what are the things I'd wish I'd known when starting out and
- what are things I want to remember for next year's tax accounts
So here are some tips for how to make things easier when it comes to doing your tax return as an artist. So just to get an overview first......
- File as you go
- Hobby income is still income
- You can use short-form accounts
- Develop an organised folder system for different tax years
- Keep business transactions in a separate bank account
- Learn how to use a spreadsheet
- Foreign Income is only complicated for some people
- Register to use the online self-assessment system
- Tell the tax people if you become self-employed
- Learn the difference between income/expenditure and receipts/payments - and all about allowances!
At the end you'll find a link to a downloadable toolkit to check for errors in your 2011-12 self-assessment return which must be in by 31 January 2013 - or you incur a £100 fine
and now to business.........
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.
1. File as you goI cannot emphasise how much this is essential to peace of mind at the end of the tax year. The basics of "file as you go" are:
- have a robust tax file
- put all your paperwork into it
That's it! That way you won't be hunting around for the paperwork and the receipts "which you know you put somewhere" when time comes to do your tax return. If you're bad about putting things in files get a spike and spike your paperwork - and that way it can't float away or get buried - and then file when you get round to it!
However there is a bit more to it than that if you want to keep things simple.
Many moons ago I once sat down with a friend who was a professional jeweller who hadn't got a clue about tax records or accounts. He pulled out his shoe boxes which were piled high with receipts - and that was as far as he'd got. I spent an evening sat on the floor with him sorting out his paper records into piles for the purposes of starting to create a financial record of his business in the previous year.......If you want to get sophisticated, this is the next step up. You need THREE files!
- one file for income paperwork eg copies of invoices and orders fulfilled
- one file is for expenses paperwork eg copies of orders/receipts for buying materials, payment of competiton fees and subscriptions
- one file for all major capital expenses with a life of more than one year eg computer, easel etc (these are treated separately for the purpose of capital allowances)
Good record keeping is essential as poorly kept records can mean that information provided is not accurate. This may result in non-business expenses being incorrectly recorded or misposted in the business records and claimed in error as allowable expenses. Conversely justifiable business expenditure may not be claimed or claimed inaccurately.Private and Personal Expenditure Toolkit 2011-12 Self Assessment Tax Returns (see link at end)
2. Hobby Income is Still IncomeMany artists start out painting as a hobby. Some enjoy it and enjpy making sales and start to classify themselves as semi-professional. Some go on to before becoming proper profesional artists. However even professional artists can also have other jobs - such as being an art teacher - which means being an artist is not always a full time occupation.
Even if you're not a full-time or professional artist, all income you generate counts as income so far as the tax people are concerned. It doesn't come free of tax! You need to make sure you include it in a tax return unless your tax people have a ruling that anything that is genuinely peanuts is "de minimus". (see Tell the tax people if you become self-employed)
De Minimus is a very useful concept - getting the pennies right is not what it's all about. Getting larger sums correct is essential if you are to avoid fines.
An abbreviated form of the Latin Maxim de minimis non curat lex, "the law cares not for small things." A legal doctrine by which a court refuses to consider trifling matters.
3. You can use short-form accountsIn the UK any business generating less than £73,000 only has to provide two totals on their tax return from their self-employed business activities - one for income and one for expenses. Plus a total for any capital allowances if these are applicable.
In effect, this tax threshold for how detailed your accounts need to be for the tax submission sits at or just below the threshold for VAT registration. The VAT Threshold has just risen to turnover of £77,000 so I'd expect the threshold for short-form accounts may rise for the 2012/2013 tax year - but don't quote me on that!
4. Develop an organised folder system for different tax yearsI am over-organised when it comes to computer folders - which means I can locate anything generally in under 5 seconds.
I know I don't want to confuse one tax year with another (which is very easy to do with respect to records - they all look very similar!). Hence I have a folder system which works as follows
- ALL TAX RECORDS
- folder for each tax year
- folders for: tax return; income; expenses
- spreadsheets which separate out different types of income and different types of expenses - and differentiate the draft tax return from the one that was filed.
5 Keep business transactions in a separate bank accountIt just makes life so much simpler - I want to keep all my domestic "ins and outs" completely separate from all business income and expenditure. It doesn't have to be a proper business bank account - you can just open a second bank account. This is the bank account to link to PayPal for business income and payments.
At the end of the year print off a transaction list - it provides a good check for making sure you've got everything listed in your tax accounts. You can also be very business-like and print this off once a month or once a quarter. File the printout in your tax records file.
6. Learn how to use a spreadsheetLife becomes so much simpler if you know how to use a spreadsheet. There's no need to use fingers or a calculator, the spreadsheet does it all for you - so long as it is set up correctly!
For those with basic levels of income and expenditure and quite simple affairs, a spreadsheet is fine. If life as an artist starts becoming more business-like and complicated then you might want to start looking at some of the software which says it makes your life easier. However there are very few around which are specifically designed for artists so you'll find you'll probably still need to adapt them to make them work for you.
I'll return to the topic of the contents of a basic spreadsheet in another post.
7. Register to use the online self-assessment systemThe things that freaks most people out is the idea of having to work out how much tax and NI they owe HMRC. However there's no need - the online system does it for you!
The financial affairs of most artists are probably pretty straightforward - even if they involve multiple activities - and they just need recording properly - plus a bit of reading of tax guidance notes for different aspects.
I would strongly advise people to register for online self-assessment. That way their tax bill is calculated automatically. Also the way the HMRC system works means to get to see what the impact of specific adjustments are before you file you final return.
8. Foreign Income is only complicated for some peopleMany of us now earn income from overseas.
However, although this has been now been happening for some time, every time I get to the foreign income bit on the tax form I freak out - until I remember that the Inland Revenue only want to know about it in detail for specific reasons - such as:
- untaxed interest or gains from overseas (ie those who are possible trying to avoid payment of tax) or
- those who had their income taxed overseas and need to avoid being taxed twice.
Foreign income or income gains is the Tax Note which provides guidance for the self-employed re business income generated by overseas customers. This is what it says
The following items should not be included in the Foreign section but in the relevant section of your Tax Return instead:
- foreign income earned by your business or partnership goes in the Self-employment or Partnership sections
- any taxable capital gains arising from the disposal of overseas assets goes in the Capital gains summary section
- foreign employment income goes in the Employment section
9. Tell the tax people if you become self-employedThis is NOT an option. The most important thing you need to know is you MUST tell HMRC if you become self-employed.
How do you work out whether or not you're self-employed? Here's the HMRC test which is used to tell whether you are self-employed or not
You are probably self-employed if you:There are various pages on the HMRC website which are specifically for the self-employed - including those who are "employed and self-employed"
- run your own business and take responsibility for its success or failure
- have several customers at the same time
- can decide how, when and where you do your work
- are free to hire other people to do the work for you or help you at your own expense
- provide the main items of equipment to do your work
There are several Guidance Notes and it's worth studying all of them. These are the links to the Guidance Notes on:
- Self-employed tax and National Insurance - this contains guidance on:
- Register as self-employed with HM Revenue & Customs (HMRC)
- Income Tax and Self Assessment
- National Insurance contributions
- Value Added Tax (VAT)
- Self-employed record keeping
- More useful links
- Employed and self-employed tax and National Insurance
If you earn income from both employment and self-employment then you pay any Income Tax and National Insurance contributions due separately and in different ways.Basically all that means is they want to know how much you got paid, how much tax you've paid in advance and then the online self-assessment system will automatically work out what you need to pay re any unpaid tax and/or NI contributions - or indeed if the Revenue needs to refund any money to you!
The total amount of tax and National Insurance contributions you pay is based on:
- your combined income from both jobs - or all your jobs if you have more than two
- any allowances and reliefs you get
- your profits from self-employment
10. Learn the difference between income/expenditure and receipts/payments... and all about allowances!Many artists, when starting out. record all transactions as receipts and payments. However tax in general works on the basis of when the transaction occurred which gives rise to income or expenditure ie which tax year gave rise to the income or the expenditure.
Receipts and payments - this way of recording follows strictly cash accounting principles ie the period of account only includes the dates and transactions when you receive money or make a payment.
Income and expenditure - relates all financial transactions to a time period irrespective of whether the cash has actually changed hands. The concept of debtors and creditors (those you owe and those who owe you) and profit or loss for a period only arises in relation to income and expenditure for activity in a specific period.
Example: You provide one-off tuition for a fee for a course in the last week of the tax year 2012. You don't get paid until the next tax year. However you delivered the teaching in 2012 and the income you earned as a result is income due to you for activity in 2012. The organisation which employed you for a fee is classified in your accounts as a creditor. The fee income earned therefore counts for the purposes of income earned in the tax year 2012 and is included in your taxable income for 2012.
Proper accounts always follow the income and expenditure method of accounting.
It's worth also getting to grips with:
- special allowances for artists
- allowances for specific expenses HMRC has rules about what you can and cannot claim as an allowable expense.
- capital allowances for major items of expenditure. HMRC use Capital allowances (now known as Annual Investment Allowances) to allow business to write off the costs of capital assets (i.e. whose use is consumed over time), such as plant and machinery, against their taxable income. Find out more about capital allowances
Special allowances for artists
One of the interesting aspects of being an artist is that the tax people recognise that cashflow can be very erratic. Hence they allow you to average your income across the tax years and be taxed accordingly. However in order to do this you need to claim this allowance/treatment
HS234 - Averaging for creators of literary or artistic works (2012) is the guidance note which helps authors and artists who have fluctuating profits fill in the Self-employment page of their Tax Return. It defines who can claim, what the conditions are for the claim and how the claim works.
Capital and revenue - allowances and reliefs
Here is some guidance on the Tax allowances and reliefs if you're self-employed -
- Expenses at a glance
- Types of expenditure and associated tax relief
- Allowable and non-allowable expenses - detail
- Key expenses, allowances and reliefs if you're self-employed
- Special rules and situations
- How to get tax relief
- More useful links
Here's the guidance as a pdf file Expenses and allowances for the self-employed - what you need to know (PDF 108K) This defines in more detail what are allowable and non-allowable expenses.
A business expense is allowable if it:
- isn't capital expenditure
- isn't specifically non-allowable
- is wholly and exclusively for business purposes
One allowance which is worth knowing is how much you can claim for using your car to transport artwork to an exhibition. You can use the Approved Mileage Allowance Payments (AMAPs) - which is updated annually - for the purposes of calculating the cost of a trip (assuming you've got a note of the mikeage). You can charge 45 pence a mile for the first 10,000 miles and 25 pence a mile thereafter of you use your car or van for business purposes. You can even charge 20 pence a mile if you use a bicycle!
This is the HMRC's Private and Personal Expenditure Toolkit 2011-12 Self Assessment Tax Returns. Worth a read!
This toolkit is aimed at helping and supporting tax agents and advisers by providing
guidance on the errors we find commonly occur in relation to private and personal expenditure. It may also be helpful to anyone who is completing an Income Tax Self Assessment tax return.
Over to you!
- So - did any of the above come as a surprise?
- What recommendations do you have for artists starting out and doing their tax returns?
Don't forget! You automatically incur a £100 fine if you miss the 31st January deadline for filing your tax return. If your tax return is more than 3 months late you will start to incur penalties of £10 per day.
UPDATE 2016: You can now find more tax tips at the Tax Tips for Artists web page I made subsequent to this post
Please note subscriptions only become live after you have verified the link in the email you will receive