By Barry Kernon, HW Fisher
Which aspect of tax causes the greatest uncertainty for writers? There are probably several candidates for the title, but if I were asked to name just one I would unhesitatingly choose allowable expenses.
On the face of it, the rules are relatively straightforward. But like everything to do with tax, it is easy to make expensive errors – particularly as tax is a subject where the law of unintended consequences often comes into play.
Most writers are aware that if certain expenses are clearly related to their ‘business’ activities they are allowable against their tax bill. Fees or commissions paid to an agent, for example, fall into this category.
But there are a number of areas where the issue is less clear cut. Consider the matter of home running costs. Assuming an individual works from home – and almost all self employed authors fall into this category – can some of their household expenses be claimed?
The answer is yes, provided certain requirements are met. If an individual rents a house or flat, a portion of the annual rent can be used to mitigate tax, as long as one of the rooms is used exclusively or substantially for professional purposes. The allowable sum is calculated as a fraction of the total number of rooms less kitchen and bathroom. Council tax, light and heat and insurance costs can also be claimed in proportion, or by reference to the floor area.
If the individual is paying a mortgage, the matter is more complex. In theory, a writer can treat the mortgage interest payments in the same way as rent – in other words, a portion of the interest paid during the tax year is allowable.
But care is needed. Imagine that the property is sold at a gain in the future. Most people will know that no Capital Gains tax (CGT) is chargeable upon the sale of their principal private residence. But if part of the interest payments were claimed against tax, the Inland Revenue might argue that the ‘business’ part of the home is ineligible for the CGT exemption.
At the time of writing, house prices seem to have stabilised. But who can say what direction they might take in future, so the partial loss of the CGT exemption could result in a substantial tax bill. And, of course, many people will already have made significant gains. There are a number of ways of dealing with this, but the issue is complicated and depends upon individual circumstances. All that can be said is that professional advice should be taken at an early stage.
As for other allowable expenses, the list is lengthy but they all fall into one of two categories – capital expenses and ongoing costs.
Capital expenses might include a computer or other office equipment, camcorders or tape recorders, a television set (if it can be justified for research purposes) or a motor vehicle if it is necessary in the course of work. Normally, individuals can apply 50 per cent of the expenditure in year one, then 25 per cent of the written down value in subsequent years.
Special regulations apply to a motor vehicle. The rule is that the lesser of 25 per cent or £3,000 can be claimed each year, minus a deduction for private use. Sometimes it is beneficial to claim a mileage allowance instead, and the rates are quite generous.
Where an asset is not used exclusively for work, the costs must be apportioned between personal and business use – not always an easy task, and one that might call for careful record keeping.
The list of ongoing costs is also extensive. Apart from agents’ fees and certain household costs, there are many other items that are allowable. These include secretarial expenses, professional subscriptions, transport and accommodation, postage, stationery and telephone and internet costs, illustrations, press cuttings, TV hire plus satellite/cable costs if justifiable, reference materials, courses and conferences, bank interest, accountancy and bookkeeping fees, repairs and maintenance of equipment, plus copies of own books for publicity.
This list does not extend to every conceivable item, and there will often be some unusual costs that apply to a specific project. As a general rule it is sensible to keep detailed records of every cost that might be allowable, and take advice if there is any doubt.
Barry Kernon is Honorary Treasurer of English PEN and the head of the Authors and Journalists Team at London Chartered Accountants HW Fisher & Company Ltd. Readers with their own queries can email him at [email protected]
Originally posted with the url: www.englishpen.org/membership/membersonly/membersservices/taxallowableexpenses/