For most people, tax return time is a dark, miserable experience full of late nights, receipts all over the floor, empty coffee cups and bitten nails. For working musicians in multiple bands it can be as complicated as Einstein turning up naked at his grandmother’s christening.
Fortunately for you, our pals at legendary London-based chartered accountants HW Fisher & Co have put together a handy FAQ for Red Dog Music fans to use in their darkest hour. This covers some of the most common questions they encounter from musicians about their tax returns and some friendly advice on how to make the system work for you as best it can. Here we go…
What are the top mistakes musicians make on their tax returns?
A common error is to show income after deduction of agent’s commission and VAT. Gross income, before deductions, should always be shown, with a separate claim being made for the commission and VAT costs.
Apart from being the technically correct way of making the declaration, showing the income after deductions may lead to an enquiry by HM Revenue and Customs because they may have received a declaration from the paying company showing the full figure.
Last year a new problem cropped up, in the form of the new “cash basis”, described by HMRC as “simplified expenses”. Opting for this denies musicians the ability to set losses off against other income, and limits certain claims to expenses. The “earnings basis” – where income is declared as earned, rather than as received, and where expenses are declared as incurred, rather than when paid – allows more flexibility.
There are a couple of common omissions – student loans need to be mentioned as does child benefit where either spouse or partner earns in excess of £50,000 per annum.
What tax issues are most musicians most confused about?
The income tax payments on account system sometimes causes confusion, particularly in the early days of the profession. Tax on the first year’s income is payable on 31 January following the year of assessment but it often comes as a surprise that a payment of another 50% is due on the same day, on account of the then current year. A further 50% payment is due on 31 July following the year of assessment. Applications can be made to reduce payments on account where it is known that income is falling.
What expenses do musicians frequently forget to claim?
The most common omission, or understated claim, is that of use of home as office. Where a room is furnished as an office or studio, a claim for running costs can be made for 365 days a year. The expenses claimed can include rent or mortgage interest, council tax, buildings insurance, contents insurance, repairs and decorating, service charges, light heat and power.
Where a room is furnished as an office or studio but not in constant use, light heat and power costs need to be restricted to actual usage.
Even if a room is not furnished as an office or studio, claims can be made for a percentage of home costs.
HM Revenue and Customs sometimes wants a single total expenses claim, but sometimes wants it broken down under categories, eg “accountancy, legal and professional fees” and “property and equipment”. So which of HM Revenue and Customs’ expenses categories should these, common musicians’ expenses be logged under? For example, are cds or dvds bought for research “office costs? or “property and equipment”? What about Union subscriptions? Agent’s commissions?Scripts? Office equipment, eg a desk lamp and a printer? Stationery and stamps?
A detailed expenses claim is only required where the author’s turnover is above the VAT registration limit, currently £82,000 per annum.
All the items listed can go under office costs except for equipment, which will always be the subject of capital allowances. A detailed record should be kept so that any HM Revenue and Customs enquiries can be answered.
Can a musician claim that most cultural expenditure, eg. cds, dvds, downloads and theatre tickets, are business expenses, as it all feeds into the work? Or does it have to be only very directly related expenses? As another example, I have a Netflix subscription. Some of the films relate to my work some are family films. Can I claim for a percentage of the subscription?
Musicians can often claim that most cultural expenditure eg. concert tickets, is business related but it is generally advisable to exclude a percentage to cover any private element. The same applies to the Netflix subscription.
Should you keep all receipts, or only those for things you are going to claim for as business expenses? Should you file these by tax year? Is putting them on a spike sensible?
We generally recommend keeping all receipts, business and domestic, together with annotated bank statements and credit card statements, and any related records, for a period of six years from the end of each tax year. Keeping non business items helps to demonstrate to HMRC that private expenses have been excluded from any claims.
It is helpful to file, tax year by tax year, and preferably on a file or folder, rather than on a spike.
Which countries, from which musicians most commonly earn performance and repeat fees, are not covered by the Double Taxation Agreement? In other words, when I see my agent’s statement, which countries should trigger me into taking action to avoid paying tax twice? And how do I do it?
The United Kingdom has double taxation agreements with most countries. It is the musician’s responsibility to minimise the tax paid in the other country. If a tax can be avoided or reduced, and the taxpayer does not take action to organise this, HM Revenue and Customs can deny the relief.
Claims should always be made under the applicable double taxation agreement. Claim forms have to be certified by HM Revenue and Customs and there are generally standard forms available for completion. In some cases the overseas tax is eliminated by the double tax claim and in some cases there is a reduced deduction.
Is it better to have one bank account for work and one for personal?
It is quite useful to have a separate account for work, because all earnings are then recorded in one place, together with many relevant expenses. However, there will always be expenses such as home costs, telephone costs, car costs etc that will not be entirely for business and may well be paid through a personal bank account.
Can you recommend good, foolproof software for keeping tax records?
I would hesitate to use the word “foolproof”, but Excel is good and reliable. Using a spreadsheet with a column for each expense heading is a suitable method of recording expenses and will save your accountant time in the preparation of your tax return.
If you find yourself without access to Excel, check out this handy list of freeware alternatives! They’ll do pretty much everything the big name brand does for tax purposes, and leave you with one less expense to claim.
If I am earning very little – just a few bits from PRS and the odd repeat fee – do I still need to submit a tax return? Even if it’s just £100 or so?
As long as you maintain that you are continuing as a professional musician, HM Revenue and Customs will require a tax return. If you say you have ceased, HM Revenue and Customs might discontinue the tax return process, but you will still need to notify them of the income , so that tax can be collected.
I play quite regularly as a member of a band. I organise bookings for the band. Quite often the members of the band change from time to time. How should I deal with the tax declaration on this income?
This can be done in a number of ways. Some bands operate as a partnership, but this involves the completion of partnership and individual tax returns. Sometimes one member of the band takes responsibility and pays the other members as individual musicians. In this case all the individuals submit their own separate tax returns. The band leader will want to ensure they have a record from the other musicians in order to support a deduction for the payments made to them. There may also be VAT implications if total income for the band breaches the threshold.
Sometimes one member of the band can act as booking agent and this works particularly well where the membership of the band changes. It is common for the agent member to charge a small commission for arranging bookings, collecting the fees and making payments to individuals.
How much do you need to be earning, in practice, before you should start thinking about charging VAT? Bearing in mind the hassle of quarterly returns…
The compulsory registration limit is £82,000 UK earnings in any consecutive 12 months. Once you have exceeded this limit, you have 30 days to register. There is a penalty for registering late.
It is possible to register for VAT at any time and musicians will generally save money by doing so. The submission of quarterly returns is quite simple. These are done online and if you operate under what is known as the Flat Rate Scheme, where you simply pay a Flat Rate of VAT without claiming VAT on expenses, the completion of returns is very easy indeed. You just add up the income, including VAT, and pay over a percentage. Currently, for musicians, the percentage is 12.5% but, in the first year of membership of the Flat Rate Scheme, the rate is 11.5%. This is because HM Revenue and Customs are encouraging people to use the scheme because it simplifies the administration process for them.
Most musicians will qualify for the Flat Rate Scheme.
There are some disadvantages. Once you are VAT registered, all freelance earnings, whether as musician or otherwise will generally become subject to VAT. This would mean that a musician who played at a wedding or who carried out activities as a freelance chauffeur or decorator, for example, would have to charge VAT to people who cannot claim it back which could make them less competitive and/or have to reduce their fees accordingly. Also VAT would have to be accounted for on payments for gigs.
What happens if both people in the household are self-employed and working at home? Can both claim a fair proportion of the total household costs? What if one person has paid the phone bill and the other the heating?
Claims are based on the expenses incurred. It does not matter which member of the household pays them. If one room is used as an office, this can be claimed, but only once. Some people claim half each. Others have a room each. The appropriate proportion of telephone and heating costs can be claimed by both as individual professionals.
Capital allowances sound complicated, what with “writing down allowances” and so on…. When I buy a new laptop, do I have to claim it as a capital allowance? Or can I just put it through as an office cost?
Currently, any item bought during a tax year can be claimed in full under the heading of “annual investment allowance”. For musicians, in practice this would be likely to cover any purchases of instruments or equipment The rules do change from time to time, though.
Writing down allowance only applies to items bought or introduced into the business in an earlier tax year, and not wholly claimed at the time. In these circumstances a claim is made for 18% of the reducing balance of this expenditure. The balance can be written off once it reaches £1,000. It is not necessary to claim the full available allowance if it is not beneficial to do so. Instead the balance can be carried forward to be claimed in later years.
I know a number of musicians who operate through limited companies. Is this a good thing?
Because the corporation tax rate for companies is 20%, compared with combined income tax and national insurance rates of up to 62% for individuals,many people do operate through limited companies. It is generally beneficial over a profit level of about £35,000 per annum. It is best to take professional advice before forming a company.
Is there a comprehensive list of the expenses I can claim published anywhere?
H W Fisher and Company, Chartered Accountants, provide a very useful “Musician’s Tax Guide”, find it here.
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