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We asked our followers on Twitter and our current novel-writing students to send us their questions about how being an author can affect your financial decisions. Andrew Subramaniam, an Accounts Partner at HW Fisher, who works with an impressive roll-call of writers, musicians and artists, sheds some light on these queries.
For a typical writer (NOT Jeffrey Archer) what proportion of a writer’s income comes from back catalogue sales? Or is it generally all about the first few months of sales?
For most writers, their income will come from lump sum advances that form the main part of their publishing contract and which are mainly received before the book is published. Usually these will be split into three or four sums, payable on signature of the contract, delivery (and acceptance) of the finished manuscript and publication. Sometimes the publication advance is split between hardback and paperback releases. This means that most writers will be able to predict their income and plan their tax and accounting strategy before signature of the contract.
A book would usually have to be much more successful than anticipated to produce substantial additional income, in the form of royalties, over and above the initial advances. While rare, it can happen, for example where a debut novel becomes a bestseller.
Significant income from back catalogues is even more exceptional and even most bestsellers will realise the majority of their income during the initial period of publication. Events that can produce substantial income for an older work include a successful film option, which may include both a lucrative option fee and renewed interest in the book.
How do royalties work? I assume they would fall under self-employment income?
For a professional writer who continues to write, the royalties arising from their own work will usually be assessed to tax as self-employment income, which allows the offset of on-going trading expenditure and the benefit of authors’ averaging.
How does being self-employed affect applying for a mortgage?
If you operate as a sole-trader, it is important to ensure you have filed tax returns with H M Revenue and Customs which show what your self-employed gross income and expenses amount to. A mortgage broker will ask to see evidence of at least one year’s taxable income, which will need to be less than 18 months old. If you can provide two or three years’ worth of taxable earnings, it might assist your broker to find a better mortgage deal.
It is important to use a mortgage broker who understands how an author’s business works, because trading profits can fluctuate from year to year, especially if a large advance is received one year and then no income the next.
What are the benefits of setting yourself up as a limited company?
One benefit is the corporation tax that a company pays on its profits (currently 19%). Whereas for those operating as a sole trader, you would pay income tax on profits on a combination of 20%, 40% or 45%, depending on other income sources of the tax year, together with Class 2 and Class 4 National Insurance contributions.
Money can be extracted from the company in the form of a salary and/or dividends (which are paid from post corporation tax profits) which would need to be reported on that individual’s personal tax return and income tax paid at their marginal rate. It is also possible to give shares in the company to family members, within reason, so that dividends can potentially be paid to them. For example, if they have a low income and are not fully utilising their tax-free personal allowances.
Another benefit is the limited liability that a director would have for its debts. This means if the company runs into trouble or goes into liquidation then the most money the director would lose would be the amount of money they paid for the company’s shares as well as any unsecured loans they made to it (note that the limited liability is lifted where a director is suspected of fraud or in cases of libel and possibly copyright infringement).
If you are working full time (in the UK) and you get a publication deal, what are your next steps, i.e. what do you have to declare and to whom?
It is quite common for authors to be employed and self-employed at the same time, so the first step should be to tell HMRC that you are in business by registering for self-assessment. You will be responsible for your own tax and National Insurance, and clear records should be kept from the outset.
You will need to report all of your income (including your employment) each year so that HMRC can assess the tax due (you will be sent a return for doing this). For the first tax year you are in business, you will not have to pay the tax on your profits until after the end of that tax year ending 5 April. But for each following year you normally pay tax and National Insurance in two instalments on 31 January and 31 July. We strongly recommend putting aside some of the income you receive towards tax liability from the outset.
Depending on the level of the advance you should also consider VAT registration, if the UK advance is significant you might have to register for VAT from the date of signature.
How does your pay/tax vary year by year and how do you manage this? For example, say you had a book out one year and sold 5,000 copies, then the next year you sold 50 copies.
There are two options available to authors, the first is available to anyone and the second is author specific.
Most self-employed individuals must make payments on account (twice a year in January and July to spread the cost of the year’s tax). These are calculated based on the previous year’s tax liability and can be adjusted down if you know your taxable income will be lower in the current tax year. But take care as if you reduce the payment too far HMRC will charge you interest on the difference. Claims to reduce can be made via your tax return, HMRC portal, postal form or telephone.
Averaging relief – smoothing out the peaks and troughs of income over successive years – is only available to a very few trades, including authors. There can be a beneficial effect on payments on account; for example by averaging, profits that would have been taxed at 40% may be taxed at 20%, but it is important to consider National Insurance implications too.
Thanks to everyone for sharing their questions. Due to the nature of creative work, many of our clients have fluctuating finances and it can be difficult to plan. If you want to find out more, get in touch today to see how we can help you or arrange a free consultation – email@example.com