Tuesday, 30 October 2012

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.] 


  1. As I love your blog, I've nominated you for the Versatile Blogger Award. If you'd like to participate and want to know how it works, here's the link:
    If not, no problem.
    Thanks for all your helpul info, on this site and elsewhere.

  2. Hmmm. I wonder how many small-scale writers are in danger of being caught out by not passing on the VAT they collect on e-book sales? I wouldn't be surprised if people haven't realised that the situation is different to print books.

    And, of course, that 0% VAT as opposed to non-vatable does everyone's head in!

  3. Karin - just seen your comment - thanks so much for the nomination. I will certainly have a go at this, but it could be a few days before I get around to it.

  4. Esmarelda, I agree the situation is unnecessarily complex. My understanding is that if you sell via Amazon, they collect and pass on the VAT on behalf of the author. Is that your understanding as well?