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Tax Discussion Group: efficiently receiving royalties

The question of how a client could receive royalties in a tax efficient way formed the basis of the discussion at this London tax forum, Andrew McKenzie reports.

May 2020

The accountant explained that his client is an author, “Agatha” who is currently writing next book. She is expecting to receive her royalties in three or four tranches. The tranches are upon:

  • Signing up to the publishing agreement upon delivery
  • Acceptance of the manuscript
  • Publication and then
  • Annually thereafter

The amounts expected are between £150,000 and £250,000 and so the Accountant was asked by his client if these monies could be received in a tax efficient way.

The group discussed various areas of this income stream covering:

  1.  Creative artist averaging claims, which would allow the income to be spread between two tax years. This may mean she would be able to preserve her personal allowance in each tax year.
  2. The amount of allowable expenses that could be offset against the income received. This was thought to be minimal, although she did expect that she would incur some costs for a promotional tour which may not be reimbursed by her publisher. Additionally she was also considering renting a property to finalise the editing of the book away from her home. Aside from these costs there was little “business” related expenditure she would incur to offset the taxable income.
  3. Whether a pension contribution would be tax efficient for her. It was thought that a personal pension for an author would further complicate the creative artist averaging claim and make the advice to the client potentially difficult. Personal pension contributions are only able to be offset against the tax year paid but extend the basic rate band. The creative artists averaging claim effectively shares the basic rate band between tax years.
  4. Whether there would be benefits to her from incorporating her business.

It was thought approach 4 would be the most sensible tax step for Agatha to take. The time of her income could be planned as needed from the Company, or not taken at all if her other income was sufficient for her needs. This was a more tax efficient arrangement than the possibility of averaging her income.

It would allow her to make Company pension contributions rather than have the complexity of the interaction of the pension contributions with the averaging claims.

However it was noted that there were more likely to be some expenditure on the book promotion tour which would not be tax efficient. This would mainly be from the taxation of her motoring expenses.

The accountant did wonder though that this would be his first client who produced works of real fiction as part of their tax returns rather than  some whose returns themselves  were fictional.

Each month (with the exception of July & August) the Tax Discussion Groups in Croydon & South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend & normally cover over a dozen tax issues raised by those attending.

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