The 5th of April is coming closer. If you own a business and live in the UK, then it means only one thing: self-assessment time.
You may think I'm bonkers, but I actually look forward to this annual encounter with the Inland Revenue. In a strange way, there is something cathartic about going through your INs and OUTs of the year: every entry is a reminder of your accomplishments and all you've done to grow your business, even when it's more about costs than profits. As a writer it is also extremely satisfying: let's face it, even a single Kindle revenue should make you happy because it means someone out there is reading your work, and you can buy a celebratory Latte with the £1.20 you just received...)
Keeping in mind that my experience is based in the UK and that I am not a tax advisor, I can share my experience to give you an overview of what needs to be done.
If you are a new author, receiving royalties for the first time, you must be all set up on the tax front, least you find yourself in trouble. If you start working for yourself, you’re classed as a sole trader. This means you’re self-employed - even if you haven’t yet told HM Revenue and Customs (HMRC). I am not discussing Limited Company here, as it goes out of topic.
You should pick up the phone and register as a sole trader, with your name as your business name, or a made up one. They will ask you what you do and, puffing your chest out, you should answer: "I am a writer!"
They will ask you for a starting date of your business. From the moment you begin writing your book with the purpose of selling it and generating income, your business begins. Most of the costs incurred in the creation of the book should be collated and documented, just as any business would.
Registering will provide you with your Unique Taxpayer Reference (UTR) – you’ll find your UTR on the registration letter HMRC sends you. This code will be needed when you register online. Doing your self-assessment online is really helpful and quick.
How do you keep track of the INs and OUTs? Plenty of choices. Buy yourself a paper ledger; buy a folder to store the invoices, receipts, etc.; create a spreadsheet on your computer to record the data; invest in a book-keeping software that keeps tracks of expenditures and incomes; pay an accountant.
You don't need to use all of the above, but no matter what digital method you use, I would recommend to always keep a paper ledger as a backup, and a folder for the bits and pieces.
Next week I will talk more about what can be claimed, expenditures and capital allowance.
You will need to decide how to work out your income and expenditures: cash basis or traditional accounting. As someone who has had a day job as an employee as well as running a business at the same time, traditional accounting helps greatly as you can offset losses against other taxable income (‘sideways loss relief’).
This is terribly important. For the first few years, the losses will outweigh the gains, as editing, cover design, marketing, networking, etc., are not cheap.
I have been doing self-assessment for several years now, and I have built my own method which allows me to work through the online form in a painless and efficient fashion. Once you start, you'll get the hang of it too.
On the 5th of April, you tally up your income and your expenditures, profits and losses. The tax return will allow you to declare profits and losses in one bulk sum or you can be as detailed as you wish. This will depend on personal choice and circumstances, so make sure you do some research on this first.
If you also are an employee, you will need to wait for your P60 to arrive, before you can complete your self-assessment, as it needs to be included. Remember that the self-assessment will also include other types of income, from the profit of ISAs to donations, to foreign income. These incomes will be part of your overall gain if you have them, not just the money from your writing.
The online form will guide you through the process, and if you are still not sure, there is a designated phone number you can use. When you finish, you are allowed to save a PDF form of the file. Tip: don't be shy and take a picture of every screen you fill as you fill it - it will make the job easier the following year, but don't forget to change the figures...)
If you are a person who likes to keep track of things, create a spreadsheet and add a chart/diagram to record the losses and the income for every year you work. Even if the losses are larger, you will watch them diminish as time goes by - truly satisfying!
I always complete my form in May, once all the bits and pieces have come in. I get the OK in the space of 48 hours, and it's me done for a whole year. No rush, and no last minute hurry.
This also means that if you have a day job, and offsets losses against other taxable incomes, you will get some money back, normally a month later or thereabout (I have actually received money within a week or two, even). I find this a lovely cash present to start the summer off!
The Inland Revenue has a dedicated page for self-assessment, and all links and info can be found here.
Don't be scared and be prepared!
Next week, same day, same time, we'll take a look at what to claim. See you then.