Are you working as a creator, perhaps as an artist, musician, writer, game designer or even a podcaster? If so, it would be understandable if the last thing you want to think about is tax.
Unfortunately, let’s face it, tax is unavoidable, and a little thinking upfront could save you considerable stress, and money, later.
Tax for creators – where to start
Whether you’re a budding Picasso, Ed Sheeran, or Agatha Christie, as far as HMRC are concerned, you’re no different from a carpenter or plumber when it comes to paying tax. And, as such, some standard principles apply.
Are you trying to make money with your creative work?
Top of this list is whether or not you are trying to make money from what you do. In other words, do you have a profit motive? If you do, quite simply, you’re a business. This applies even if you have another full-time job doing something completely different, or if you’re making no profits from your venture.
Are there any exceptions?
The good news is that if the income from your creative work is relatively minor, you may be able to take advantage of the trading allowance. The trading allowance allows you to earn a hobby-based income of £1,000 per year which is exempt from tax.
It is important to note that income means revenue in this context, not profit.
If the money you get from all of your sole trader or hobby-based activities is less than £1,000 in a tax year, you do not need to register as a sole trader, complete a Self Assessment tax return, or make any formal claim for the trading allowance.
How many transactions do you make?
The second consideration is the number of transactions your enterprise makes. If your transactions indicate a one-off activity for which you were paid, this may suggest that you’re not trading.
However, if you seek to sell several items, or – as we shall see later via Patreon – to manage a fee-based system with your customers, that will indicate that you are operating as a business. More information on what HMRC call the badges of trade can be found on HMRC’s website.
As you’ll see, there is an awful lot of common sense involved. If it looks and feels like you’re doing business, the chances are that you’ll be considered as trading from a tax perspective.
Trading allowance and tax relief
We’re accountants, so we’re going to jam the brakes on here so we can point out that even if your income is above the trading allowance threshold, you can still use it to claim tax relief.
If your income – and remember, income, not profit – is higher than £1,000, you have an important choice to make.
You could deduct £1,000 from the profit that you made in the year. So, for example, if you made £5,000 of sales, you could then claim the £1,000 allowance in your tax return, reducing your taxable profit to £4,000. Tax is paid on profit, so reducing your profits with the trading allowance means you’ll pay less tax.
Using the trading allowance versus claiming expenses
However, while this is nice and simple, it may not be in your best interests to do this. This is because HMRC’s rules allow you to deduct certain business expenses from your income.
Unfortunately, you can’t claim both the trading allowance and expenses.
You can either claim the £1,000 trading allowance or claim expenses, so you need to look at what works best for you.
So, taking our example above, imagine that you still made the £5,000 worth of sales. You also have £1,500 of expenses which, under HMRC rules, you find that you can claim against your revenue.
Rather than claiming the £1,000 trading allowance, you can claim £1,500 and reduce your taxable profit even more, which means you’ll pay less tax.
Taxable profit if you claim the £1,000 trading allowance
Taxable profit if you claim tax relief on your £1,500 allowable expenses
£1,000 trading allowance
Income, minus your deductions, which leaves your taxable profit
As an aside, it is imperative that you keep your business-related records up to date, with a process known as bookkeeping. Keep all your records safely and conveniently filed so that you have all the backup for your sales and expenses to hand when you do your tax return.
Make sure you keep them after you’ve submitted, too. You may well need them in the future to justify your numbers to HMRC! Plus, keeping great records will mean you claim for every possible allowable expense.
What if I don’t want to be a sole trader?
The most common alternative legal structure to trading as a sole trader is to establish a limited company. A limited company is a separate entity from its owner so it’s the company, rather than you as an individual, who is responsible for the business’s liabilities and debts.
This means that the profits also belong to the company, not to you. The principal benefit of this structure is if something goes wrong. Then, only the assets of the business are at risk rather than your personal wealth.
Creative industry tax relief for limited companies
Being a limited company in the creative fields may have an added attraction when it comes to its tax treatment. If your business is in one of the following fields, you may be eligible for a special Creative Industries tax relief:
Galleries or Museums
In 2019/20, £1.1 billion was claimed in such relief. If you think your business could benefit, contact HMRC directly.
Using Patreon to sell your creative work from the UK
If you’re working as a creator, you may well be familiar with the Patreon platform. It allows the creator to make their work accessible directly to their customers and fan base.
Better still, by using a membership or subscription model, it gives the creator a much more predictable revenue stream. Created back in 2013, Patreon now has over 200,000 active creators onboard.
Patreon divides its creators into ten different sectors: Podcasters, Video Creators, Musicians, Visual Artists, Communities, Writers and Journalists, Gaming Creators, Not-for-Profit, Tutorials and Education and Local Businesses.
The platform offers creators the chance to sell a more personalised experience such as:
Access or insight – This could mean access or insight into content that they usually wouldn’t see. What goes into making a video or a studio recording, for example.
Engagement – Direct contact with your customers, recording live streams, or perhaps hosting online events.
Fan recognition – Add their names to your products. Personal recognition of their following can be very attractive to some fans.
Digital and physical products – This feature allows you to distribute products directly to your supporters. This could, for example, be a web comic, or a personalised sketch. Basically, whatever you think will appeal to your customers.
How much should I charge for my work on Patreon?
One of the most common questions from anyone selling their own products or services is about what to charge. Know your worth! Research what other sellers charge, and factor in the effort that you put into production.
It’s also worth knowing what you’ll be charged by the platform for their hosting and handling fees. Patreon earns fees from you in two ways.
Firstly, it charges everyone to process their payments, and these fees range from 2.9% to 5%, depending on the size of the transactions.
Secondly, it also charges you a monthly fee depending on which package you have signed up for. The basic ‘Lite’ package, which includes hosted pages, communication tools and workshops, costs 5% of your monthly revenues. A ‘Pro’ package, which includes extra features, will set you back 8% of your revenues, while its top package, the ‘Premium’, will cost you 12%. Full details can be found on the company website.
Patreon and tax for UK creators
The first thing to get clear in your mind is this: your earnings from Patreon are taxable. The second thing you need to know is that Patreon will not help you when it comes to sorting out your tax. It is solely your responsibility!
If you sign up for Patreon in particular, you will find that you are confronted with a scary sounding W-8BEN form during the initial process. You have to complete this to be able to trade from the platform.
What is a W-8BEN form, and why do I need one on Patreon?
In short, it’s not as scary as it sounds, but it is worth understanding why you’re filling it in. You need to do this because Patreon is an American company registered for tax in the United States.
Under US rules, you would ordinarily need to withhold a proportion of the payments made by any of your US customers, in order to pay tax to the US tax authorities. However, don’t panic, fill in the form, and you won’t need to do this.
You won’t need to do this because the United States and the United Kingdom have a tax treaty in place. Put simply, by filling in the form, you are removing yourself from the clutches of the US tax authorities. So, just fill in the form, and you’ll only need to worry about your UK tax payments.
Claiming Patreon costs as expenses
Regarding UK tax, remember that if you’re deducting some expenses from the profit you’re declaring on your Self Assessment return, some Patreon costs may be allowable.
You may be able to offset the fees you pay to Patreon, and any currency conversion costs if you’ve been paid in foreign currencies against your taxable profit.
Again, make sure you keep your records neat and accessible. This will make filling in the return much simpler, and help you avoid the risk of incurring HMRC penalties for late or incorrect submissions.