THE SCORE... No. 7. Tax Issues. First thing s first... Keeping Good Records Your Most Important Rule! Be Organised. Get Online.

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1 THE SCORE... No. 7 Tax Issues For a freelance composer or songwriter, the wonderful world of tax can seem like a minefield. As someone who is self-employed, what are your main responsibilities? How much income tax do you have to pay? How do you complete your tax return? What expenses may be claimed against tax? The following information sheet should outline the basics of what you need to know and point you in the direction of further information. And don t forget, BASCA s Tax Helpline is always on hand to answer any specific questions you may have First thing s first... As soon as you begin to work as a professional or semi-professional writer i.e. as soon as you start earning any income from your craft you MUST register with Her Majesty s Revenue & Customs (HMRC) as self-employed. You may receive an automatic 100 fine if you fail to do so. Contact them on or visit uk/migrantworkers/self-employed.htm (See below The Sole Trader). Keeping Good Records Your Most Important Rule! Understanding and controlling your finances makes sound business sense. It may seem like a challenge, particularly when you re starting out, but having a proper system in place from the outset will bring real advantages to you as a self-employed writer. Be Organised Keeping good records of all payments you make and all monies you receive is essential and will reap numerous benefits. Keep copies of all receipts, invoices, payments received etc, preferably in date order. If possible, keeping a simple computer spreadsheet with columns to help you categorise your income and expenditure is an easy way to keep track of your finances, (but do still remember to keep invoices, receipts and cheque-stubs). If you prefer the paper and pen option, a multi-column exercise book would serve just as well! You should also keep copies of any correspondence you have with the taxman, however mundane the subject matter may seem. Good financial records will: > Help you avoid paying too much tax and make filling in your tax return easier > Help you avoid interest and penalties as it will be easier to pay the right tax at the right time > Give you the information you need to manage your business and help it grow > Make it easier to get a loan > Help you budget for tax payments and help to check your tax position accurately > Could help reduce your accountant s fees, if you use one As mentioned before, it is vital that you keep all of the above records for tax purposes even if you decide to employ an accountant to deal with your accounts YOU are responsible for the accuracy of any information supplied to the tax office and will be held accountable for any mistakes. Get Online Registering for online banking is a great way to be sure of your current cash flow position. It saves time and allows you to make payments very quickly. Any concerns about security are now almost negligible, with most banks insuring their services against fraudulent activity. Online communication with HMRC can also save you time and money. Over the coming years, some government departments will make online returns and reporting compulsory. Communicate Communicate with HMRC as often as you need to. They are very keen on giving advice as they want people to understand current taxation laws and to pay them correctly. They offer many telephone services and a range of other seminars and one-to-one sessions. Visit for assistance.

2 THE SCORE... Tax Issues Page 2 Learn the Basics Even if you have had no formal financial training it will benefit your business if you learn the basics of financial management. This includes understanding the terminology used and how to use and interpret a cash flow, a profit and loss statement and a balance sheet. Business Link offer free advice both on their website at and in the form of hundreds of free day-long seminars that they run nationally. There are many other online companies that offer manuals and e-courses. And, of course, if you have an accountant he or she should always be on hand to offer one-to-one personal advice. Don t like the idea of DIY financial management? Then you should find a good accountant! Word of mouth recommendations are often the best way to start your search. However there are a number of professional associations which can help you find a qualified accountant - see The Score... No.3: Surrounding Yourself With A Good Team for further information. The Sole Trader As a composer or songwriter, you are likely to be self-employed. Setting up as a self-employed sole trader is the simplest and quickest way to start a one-person business. It offers freedom and opportunities, but there are also legal and financial responsibilities to bear in mind As a sole trader you have to: > Register with HMRC as self-employed. Contact them on or through > Set up a financial record-keeping system (see above) > Complete a self assessment tax return every year > Pay National Insurance Contributions (NICs) > Obtain any permits and planning permission that you may need from your Local Authority > Contact your local authority to find out whether you need to pay business rates > Contact HMRC to register for VAT if you expect to have turnover of more than 61,000 a year > Put your name on all your business stationery, including letters, invoices, receipts and cheques > Hold your own Public Liability Insurance (and Employers Liability Insurance if you also employ people) You may trade under your own name, or use another business name. If you decide to use a business name, you must make sure that your business stationery displays your name as well as the trading name of the business. Your trading name should not be the same as - or too similar - to that of a business which already exists. You may still manage your book-keeping yourself in order to save money (see section above), but it is advisable to engage a qualified accountant who understands tax or a tax advisor to verify your accounts. It makes sense for composers and songwriters to use an accountant who has experience of the music industry as the advice they are able to give you will be more relevant. See The Score... No.3: Surrounding Yourself With A Good Team for more details. Income Tax & National Insurance As a self-employed writer, you are responsible for your own tax and National Insurance. As soon as you start to earn money from writing music, you must inform your local tax and social security office that you are a business. This does not mean that you will automatically have to pay income tax, but it is the law. You must: > Inform the tax office (by completing a tax return) of all related income during each tax year by 31st January every year. > Pay Income Tax. Income Tax rates and taxable bands are as follows: Starting rate for savings: 10% 0-2, , ,440 Basic rate: 20% 0-34, , ,400 Higher rate: 40% Over 34,800 Over 37,400 37, ,000 Additional rate: 50% Not applicable Not applicable Over 150,000 You will normally pay this tax in two instalments (31st January and 31st July each year), but for the first tax year in which you are in business, you may not have to pay the tax on you profits until after the end of that year.

3 THE SCORE... Tax Issues Page 3 > Pay National Insurance per week if you earn over 4,825 per annum - 8% of all your profits if you earn over 5,435 per annum - an additional 1% on all profits over 40,040 per annum > Keep all records regarding your self-employment for a minimum of 6 years. > Keep track of all expenses incurred from your work, as these will be deductible from the amount they charge you. Remember: Even if you have an accountant, you are solely responsible for the information provided to the tax office. Value Added Tax (VAT) Anyone can apply for VAT registration, but if you earn over 60,000 per annum you must register with HM Revenue & Customs. VAT registered composers should claim back the tax on all their outgoing business expenses (see Business Expenses below) and also charge an additional 17.5% for every service they provide, such as attending meetings, running workshops or providing commissioned music. The difference between the two amounts will either be refunded to you or payable to the tax office. Self-Assessment - Your Tax Return The self-assessment system, whereby a person completes a tax return before the required tax payments are calculated, has been in place for over ten years. It has recently become possible to complete your tax return online, although you can still complete hard-copy forms. Hard-copy tax returns must be completed and submitted by 31st October immediately following the tax year in question (e.g. your tax return for the year 6th April th April 2009 must be submitted by 31st October 2009). If you opt for the online route, you have slightly more time to play with your return will be accepted up to 31st January following the end of the tax year (so, using the previous example, your tax return would have to be submitted by 31st January 2010). It is extremely important that you stick to these deadlines there are stiff financial penalties for failing to comply. For further information, visit Once your tax return has been completed and submitted, HMRC will process it. At this stage, the return will not be scrutinised too closely, but checks will be made for obvious errors, such as the figures not adding up. If you have not calculated the tax you owe, HMRC will send you a calculation of the tax which is payable. If you HAVE calculated the tax you owe, you will receive either confirmation that the return needs no correction, or you will be sent details of where and how HMRC s figures differ from yours, and the corrected amount of tax you will need to pay. (As tax-returns are now self-assessed, the right to appeal against your tax assessment is generally redundant. However, if HMRC amend/increase the amount of tax they think you owe and you don t agree with their decision, you have 30 days to appeal.) If the tax inspector thinks that something serious is amiss, he may open a formal enquiry into your tax return. HMRC also conduct a number of entirely random enquiries every year. However, if your tax return is to be subjected to a formal enquiry, you won t be told whether it s a random check or if they suspect something is wrong! Provided you submitted your tax return by the specified deadline, the tax man has twelve months from the date you submitted your return to do this. The enquiry will open with a letter to you (and your accountant, if you have one) detailing the particular concerns regarding you tax return. You may be asked further specific questions, or asked to submit documentary evidence relating to some of the entries on your return again, the need for detailed and accurate records of ALL expenditure and income is paramount! If you are informed that HMRC will be conducting a formal enquiry into your tax return, and you don t already have a personal accountant, this may be the time to consider employing one! An accountant who has experience of dealing with tax return enquiries can be worth his weight in gold, as the costs of dealing with an HMRC enquiry can be substantial, particularly if they decide you owe additional tax interest will be charged on any outstanding amounts, and you may be subjected to further financial penalties. It is worth bearing in mind that insurance policies exist to protect you against the costs involved in full HMRC enquiries.

4 THE SCORE... Tax Issues Page 4 Business Expenses Running a business costs money, but the burden can be somewhat lessened thanks to the Taxes Act which permits self-employed people to claim for certain allowable expenses. You will need to be able to prove to HMRC that the expenses you are claiming for were wholly and exclusively for the purpose of trade so again, detailed and accurate written records will be essential. Below is a small selection of some common allowable expenses which may be particularly applicable to composers and songwriters there will be many more! See for further details, or contact BASCA s Tax Helpline with specific questions. (If you have any doubts about whether or not to claim certain allowances or expenses, it s better for you to claim them than not! The taxman won t offer to make allowances for anything you haven t claimed, but he can always refuse if he thinks you ve made an incorrect claim.) BASCA Membership. As a composer or songwriter, your membership of BASCA, a professional association, is an allowable business expense. Hire of essential equipment / services. This includes hiring rehearsal rooms, studio space, recording facilities, instruments and any other equipment essential to completion of a job. Accountancy fees. Solicitors fees. Commissions paid to your manager or agent. Travel. If you have to attend a rehearsal or recording of one of your works, or need to travel to work with a current collaborator on a certain project, you should be able to claim for business mileage. The same applies in these circumstances to over-night accommodation - if being away from home for a few days is essential to the completion of a project, you will be allowed to claim for this. (It is important to note that travel on a daily basis to your studio, for example, will not be allowable if you spend most of your working time there, the tax man will argue that the studio is where you carry out your trade, and not your home.) Stationery. Pens, paper, diaries, business cards any item of small office equipment required to run your business should be an allowable expense. Manuscript paper is also allowable. Postage. If you are a songwriter who regularly sends out copies of your demo to potential publishers and artists, or you are a self-published composer who prints and supplies your own scores to hirers and customers, this will be particularly invaluable. Again, you will need to keep all receipts, so make sure you request them from the post office whenever you send out a package. Telephone calls / broadband costs. The tax man is unlikely to allow you to claim for all of your phonecalls, particularly if your home phone line doubles as your business line. So again, keep good records so that you can work out a reasonable percentage figure for your business calls (itemised phonebills and a log of how much time you spend on the internet/sending s will help). As Your Business Expands... Once your business has reached a certain level of income, or you are employing other people on a regular basis, you may want to cease being a sole trader and consider incorporating as a limited company. As a sole trader or other non-limited business, personal assets can be at risk in the event of a failure of the business, but this is not the case for a limited company. As long as the business is operated legally and within the terms of the Companies Act, directors or shareholders personal assets are not at risk in the event of the business going into receivership. Also many of the costs associated with managing and operating a limited company are not much greater than with business which is not incorporated. Company Registration Companies House is responsible for company registration in Great Britain. It also has a key role in providing information about British companies to the public, and this transparency of trading gives confidence to potential creditors, financial institutions and potential business partners. The Companies House website is

5 THE SCORE... Tax Issues Page 5 The main functions of Companies House are to: > Incorporate and dissolve limited companies > Examine and store company information delivered under the Companies Act > Make this information available to the public A new company must: > Complete form IN01 (Application to Register a Company available on the Companies House website) > Give details of its constitution in the form of a Memorandum and Articles of Association > Give details of its directors, company secretary and members > Have a registered office The necessary documentation is often prepared by private sector formation agents or most accountancy practices, but there is no requirement in law to use an agent and in fact this can often prove to be a more expensive option. Helpful links: Her Majesty s Revenue & Customs HMRC s official website, covering everything you need to know about taxation in the UK. HMRC Are you thinking of working for yourself? A brochure produced by HMRC which tells you everything you need to know about going it alone Business Link An invaluable online resource, offering free business advice and a support service BASCA 2009

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