Tax Matters

[This week’s post is specific to the UK; the principles apply in most countries but the specifics vary, so non-Brits need to review the requirements with your national authorities]

In my experience, no-one likes paying taxes. (If there’s anyone out there who disagrees with this, leave a comment and we’ll debate the question.) However, it’s the law of the land that if you earn money, you have to pay tax on it. I was once approached by an irate writer who said “but it’s only a hobby”. I’m afraid HMRC doesn’t recognise the distinction.  But in our case, we’re writing as a business, not a hobby, so there’s no question about it: we need to understand the tax systems as they apply to us.

This is just an overview of the topic. For detailed information, consult an accountant or go direct to the relevant authority. I find the HMRC website very useful; better still, ring one of the specific helplines.

There are four main types of tax to think about: income tax, corporation tax, value-added tax (VAT) and national insurance.

Income Tax

·       This is paid on our income, after deduction of expenses and allowances;

·       This tax applies to everyone. Employees (including Directors) of limited companies pay via the Pay as You Earn (PAYE) system, in monthly amounts. Self-employed people pay via the self-assessment system and usually make two payments per year;

·       There are different rates of tax, depending on income.

Corporation Tax

·       This is the tax on company profit after all expenses, including salaries, pension contributions etc have been made;

·       This tax only applies to limited companies; it is paid annually in retrospect following completion of the annual tax return;

·       There are different rates of tax, depending on the level of profit, but no tax-free allowance.

Value-added Tax (VAT)

·       If a company or a self-employed individual is registered for VAT, they must charge it on all sales made;

·       VAT registration is mandatory above a certain income level (currently £77,000 in UK); and while that is not likely to worry many of us, especially in the start up phase of our business, it is important to know that VAT registration is optional at any level of income;

·       VAT is charged at different rates for different goods and services (20%, 5%, and 0%). Hard copy books are zero-rated (although e-books are currently charged at the full 20%);

·       If a company or an individual is registered, VAT must be charged on invoices;

·       But [and this is probably the most important point in this whole article] if a company or an individual is registered, VAT on all payments can be claimed back from HMRC;

·       Let me say that once again: if we are registered for VAT and selling books, our sales incur a zero rate — so no downside for our customers — but all VAT that we pay on stationery, printer cartridges, office furniture etc can be claimed back;

·       If we are selling ebooks via Amazon, they charge VAT and handle it for us;

·       There are special schemes to make administration of VAT simpler, depending on the size of the business (measured by gross income level).

National Insurance

·       This is the tax that builds our entitlement to certain state benefits including state pension;

·       Class 1 contributions are paid by both employed earners and their employers within the PAYE system; this is a big expense and is possibly the biggest disadvantage of a limited company;

·       Class 2 (an initial flat-rate) and Class 4 (additional rate, based on level of profit)   contributions are paid by the self-employed;

·       There are exemptions available for anyone on low earnings, but these need to be applied for, not assumed.

[As always, note that I am not an accountant or a lawyer, just a long-term business owner, talking about my own experience. If you are unsure about anything, always take advice from an appropriate professional.] 

The Next Big Thing: Tina's Work in Progress

Last week, I tagged writer Tina K Burton, giving her the task of talking about her latest work in progress. Tina doesn't have her own blog, although you can find out more about her on her Amazon author's page, so I invited her to visit me and answer her questions here instead. So welcome Tina:

What is the working title of your book?

Born To Love Me.

 Where did the idea for the book come from?

A weird dream I had.

What genre does your book fall under?

It’s a psychological thriller, but also a love story in a twisted kind of way.

What actors would you choose to play the part of your characters in a movie of your book?

I have no idea but I’d want British character actors not celebrities.

What is the one sentence synopsis of your book?

Genetic scientist Elizabeth is devastated when her husband is killed in a car-crash and will do anything to get him back, but in doing so, she doesn’t realise what a dangerous character she has created.

Will your book be self published or represented by an agency?

I’d like to seek agency representation, but if I have no luck then I’ll self publish.

What other books would you compare the story to in your genre?

It’s like The Time Traveler’s Wife in that it’s a kind of sci-fi love story, but it has a twisted edge to it.

What else about your book might pique the reader’s interest?

It’s dark and intriguing, but you also feel for the main character because even though what she does is horrific, you understand why. It has many layers – at times it’s quite scary, but at others very sad.

 

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Thanks, Tina, for dropping by; I'm looking forward to reading 'Born to Love Me' when it's published.

 

This game of tag seems to be coming to an end, but if any writers out there missed out, give me a shout via the comment box and we'll tag you for next week.

 

The Next Big Thing: My Work in Progress

Last week, friend and fellow writer Madalyn Morgan tagged me in her post 'The Next Big Thing'. Click on Maddie's article to read about her second novel Applause. This week, it's my turn to answer questions about my current work in progress, so here goes:

What is the working title of your book?

Gorgito’s Ice-Rink

Where did the idea for the book come from?

I’ve been travelling to Russia and the former Soviet Union countries since the early 1990s. I wanted to write about my experiences, but found I can write fiction more effectively than memoir. Gorgito is based on someone I used to work with in Russia.

What genre does your book fall under?

It’s essentially a quest novel but with an undercurrent of romance as well.

What actors would you choose to play the part of your characters in a movie of your book?

(Assuming that we’re looking at all actors, rather than ones who are the right age today) Gorgito would be played by Anthony Quinn (I see him as a sort of Russian Zorba); Emma would be played by Kate Winslet (playing her proper but ballsy); Yulia would be played by Jessica Ennis (whom I need to persuade to change careers); and Viktor would be played by Robert De Niro.

What is the one sentence synopsis of your book?

A Georgian businessman struggles with bureaucracy, corruption and the weather in his attempt to build an Olympic-standard ice-rink, in order to bring home a young Russian skater who has gone to America to train — and in so doing, to make up for a promise he was unable to keep many years ago.

Will your book be self published or represented by an agency?

I will be seeking agency representation, but otherwise, I will publish via Chudleigh Phoenix Publications, where I currently publish my short story anthologies.

What other books would you compare the story to in your genre?

One obvious comparison would be with A Short History of Tractors in Ukrainian as I am aiming for the same light humour that Marina Lewycka achieves; but in terms of the quest, it is similar to Salmon Fishing in the Yemen in which Paul Torday shows different characters gradually being won over to the seemingly impossible dream.

How long did it take you to write the first draft of the manuscript
I started writing it in 2006. I finished the main storyline this summer. I am currently writing two sections of back-story which involves a lot of research into 19960s Soviet Russia. I plan to be finished by the end of this year.

Who or what inspired you to write this book

I made some wonderful friends and had some great experiences in Russia. I wanted to make sure they weren't lost.

What else about your book might pique the reader’s interest?

It opens with a brief prologue set at Gorgito’s funeral in 2005, but chapter 1 then goes back to 1995. The reader knows from the start that the title character is going to die, but needs to read on to find out when, where, how — and whether he achieves his goal or not.

****************************************************************************

My final task is to tag the writers who will take on this set of questions next Wednesday. My list is still being assembled and will grow over the next few days. For now, I present to you:

Tina Burton (who doesn't have her own blog, but will be guesting on here next week).


Maria Smith: http://www.firstdraftcafe.blogspot.co.uk/

Business Structures

One of the questions to be resolved when setting up any small business is which structure is the most appropriate? There are a number of options including: self-employment; partnerships; limited liability partnerships; and limited companies. I’m going to look at the first and the last of these, as the two options that most independent writers would consider when putting their writing on a business footing.

 

Key points of self-employment (also called sole trading) in the UK are as follows:

• There is no financial separation between the individual and business

• There are no formal positions in the company

• There is a need for registration with the tax authorities within 3 months of starting trading
• Tax on earnings is paid through Self-assessment and National Insurance
• Personal drawings (salary) are taken after tax has been deducted

Key points for a limited company in the UK are as follows:

• The company is a separate business entity with finances separated from the individual
• The company needs one or more directors plus a company secretary (although these can be the same person)
• The company must be registered at Companies House (and annual returns must be made) plus tax authorities
• Individuals are employees and are paid salaries from pre-tax profits (including Directors)
• Individuals’ income tax is paid through the PAYE system
• Dividends are paid after corporation tax deducted.

The advantages of self-employment include it being a cheaper option with less administration and benefits such as the availability of free banking. The disadvantages include the fact that all the assets (personal and business) are at risk and it may be more difficult to raise finances if required.

The advantages of a limited company include separation (and therefore some protection) of personal assets plus the possibility of an enhanced image with potential clients. The disadvantages include increased levels of administration and higher costs.

The choice that any writer makes on business structure will depend on their individual circumstances. I have run a limited company for twenty years, associated with other activities, and have simply added my writing to the mix. My systems are established and simple to operate; for me, it was the obvious choice. That would not necessarily be the obvious route for a new business.

Note: I write these articles as an experienced small business owner, hoping to clarify issues for writers starting down the journey towards running their own business and to help identify questions that need to be asked. I am neither a lawyer, nor an accountant. All the issues covered above can be complex (especially those relating to tax matters). ALWAYS take professional advice before deciding which route to take.

Giving It Away: Should We Write For Free?

[By pure co-incidence, fellow-writer Patsy Collins has also been blogging about the same topic this week, although she is talking about the provision of free books for Kindle. Read her article here.]

If there is one subject that seems to cause more conflict among writers than any other, it's the question of giving our writing away for free. I've seen some quite vicious arguments break out on some of the forums (and as writers, we all know how to use our words as weapons, don’t we?) each time the question is raised. At the one extreme, there are some people who believe that we should never write anything for nothing; we may be craftspeople, but we still have to pay the bills; publishers and printers all get paid, so why should writers be any different? At the other extreme, there is a view that the words are more important than the money and that we should use any and all opportunities to get our writing published — even if we have to pay for the privilege rather than the other way around.

Personally, I sit somewhere in the middle — and as always, I am looking at it from the point of view of a business-woman as well as a writer. We should never be ashamed to expect payment for our writing. It may take thirty minutes, an hour or a day to write something; but it has taken twenty, thirty or more years to learn how to write that something.

However, very few of us only do one type of writing all the time. We tend to write in different ways for different purposes. For example, here are some of the ways in which we might write. Most, but not all, further our businesses, although not all of them do so with direct financial returns. The key thing is to understand which is which and to decide whether each individual piece of writing is worth it or not.   

·       Articles for newspapers and journals are generally written on commission. Hence we have a formal or informal contract and an expectation of payment on delivery or on publication. (Don’t forget to send an invoice with the piece.)

·       Non-fiction books and fiction books by established authors are generally written on commission. We would expect a formal contract and, if we are lucky, an advance paid at time of contract and/or delivery of the manuscript. Further payment will depend on sales of the book, although we will not be asked to pay back the advance if the book bombs.

·       Fiction books, for first-timers, are generally written on spec. We are continually being told that this is not the way to a fortune, unless we are very good and very lucky. Hence this would come under the heading of potential financial returns.

·       To succeed as a writer these days, we all need to develop our ‘platform’. Increasingly this implies engagement with social media plus blogging.  No-one is going to pay me for writing this column (and nor would I expect them to) but if it brings my name to the attention of more potential readers, it is beneficial for my business.

·       Like musicians, writers get better with practice. When I first started writing creatively, I spent some time working on articles for one of the dreaded content sites. I never expected to make much money from those articles (and my expectations were not exceeded) but working out how I could improve my writing and watching my ratings to see what worked and what didn’t was a valuable exercise.

·       All businesses need planning and development. We covered planning in an earlier article. Development might include writing proposals for articles or books. Not all of those pitches will be successful, but the more we do, the ‘luckier’ we become. We would never expect to get paid for these proposals (I’m always suspicious of anyone who offers me a ‘free quotation’ — what else should it be but free?) but they are an important part of growing our business.

·       Writers get all sorts of requests to provide their work for free. And we always have the option of saying no. But sometimes we might want to say yes. I write for and publish Chudleigh Phoenix, a small local community magazine. It has no funding, so my co-editor and I don’t get paid. But that’s our choice — and I make sure it doesn’t eat into too much of the time that I need to devote to my business. (I also make sure that the readers of the magazine know about my books and short stories as well, so even my ‘donated’ writing can benefit the business in some way.)      

Thinking About Finances

One phrase that is often quoted by experienced business people is: turnover is vanity; profit is sanity. The long-term objective of any small business is to be successful, otherwise why do it? In the context of this article, I’m going to define success as profitability.  (I know that’s not by any means the only measure of success, but it’s the one I’m dealing with today.)

So, in all businesses, and writing is no different to other businesses, there is one important equation:  income minus costs equals profit. 

The financial advice most appropriate for us as small business owners will often depend on the stage we have reached on the life-cycle of our business. If we are just starting out then our financial priorities and expectations will be different from when we have an established or mature business. 

Today we’ll look at the start-up situation. Starting out is a difficult period. 

·       We have to identify an aspect of our writing that is saleable and which we can deliver.  We may have to experiment or do some development before we get it right.

·       We have to identify our potential customers and get the message out to them that we are around.

·       We need systems in place to make sure we get paid for our writing.

These activities may take some time to get through and need to be completed before we can expect any income.  Therefore we need to think about interim funding options. 

·       Do we have savings or investments we can rely on? 

·       Do we have other members of the family who can help? 

·       Are there any grants or other types of financial support available?

·       Do we need to take out a bank loan? 

The bank loan option should be the one of last resort.  It’s a mistake to take on an additional financial commitment, such as an interest payment, before we know whether our business will succeed or not.

At this stage, our own wage is the last thing on the list.  Although, if we have any staff associated with this business, we have to make sure their wages are paid — even if ours aren’t. (This would include the support team like child-minders or cleaners that we use to clear our own time for writing.)

Despite my opening comments about profitability, at this early stage, just being able to pay the bills and keep the business open can be considered a measure of success.  [Unless we are very lucky this is certainly not the time to be thinking about company cars, health insurance or membership of the local golf club.]