Tax and Self-Employment – Northern Ireland


While every effort is made to ensure the information in this article is accurate, Visual Artists Ireland and the author can accept no responsibility for loss or distress to any person acting or refraining from acting as a result of the material contained herein.

What Does it Mean to be Self-Employed
Self-employment means that you work for yourself or in partnership with others. Being self-employed enables you to choose the type of work you wish to undertake and the amount of time you wish to spend working on it. You have a greater flexibility and control of your career, and you are entitled to claim tax relief on certain expenses that you would not be able to claim as an employee.

However, there are disadvantages to being self-employed. You cannot be sure of a regular income, you do not receive holiday pay or other employee benefits and you have to run and manage your own business. You also have to carefully manage your cash flow, and if you take on employees you are legally responsible for collecting their tax when calculating their salary.

Being Employed as well as Self-Employed
Whether you are an employee or self-employed should be determined by the person you work for.

However, it is not unusual for an artist to be both an employee and self-employed. You can be a self-employed artist but also supplement your income as an employee – for example teaching or administration.

Employees have their tax and National Insurance deducted at source (by their employer). If you are self-employed you will be responsible for paying any additional tax and National Insurance due.

Anyone who is in receipt of self-employed income is obliged to complete a Self-Assessment tax return.  The information on this tax return will enable HM Revenue & Customs to calculate your tax and National Insurance liability (although you have the option of calculating your own tax liability – see section  below entitled Tax Obligations).

If you are both employed and self-employed you are required to complete a tax return. Your employer will have deducted tax from your salary but this information must still be included on your tax return.

Registering as Self-Employed
You must register with HM Revenue & Customs as self-employed within the first three months of trading. Failure to do so may result in a £100 penalty.

You can register in writing or by calling HM Revenue & Customs on 0845 915 4515.

Your registration will cover Tax and Class 2 National Insurance Contributions.

National Insurance (NIC)

*Class 2 NIC
As a self-employed artist you are obliged to pay Class 2 NIC, levied at a flat rate of £2.40 per week (2010/2011).

Paying Class 2 NIC entitles you to claim state benefits such as Maternity Allowance and Incapacity Benefit; and it also counts towards your basic state pension.

Class 2 NIC is payable either monthly or quarterly by direct debit or by quarterly bill.

If you believe that your business profits (income less business expenses) are going to be less than the Small Earning Exemption (SSE), currently £5,075 you can apply for an exemption from paying Class 2 NIC.  Before you do this you should consider the effect that not paying National Insurance would have on your future benefits entitlement.  If you retire after 2010 you will need to have paid National Insurance for 30 years up to your date of retirement to qualify for a full state pension.  If you claim a Small Earning Exemption in any year, this year will not count towards the 30 years you need to claim a full pension.

* Class 4 NIC
Class 4 contributions are paid by the self-employed in addition to Class 2 but they do not count towards any additional benefits.

Class 4 NIC is paid to HM Revenue & Customs at the same time as a self employed individual’s Income Tax liability.

Class 4 NIC is calculated on taxable business profits at the following rates:

2010/2011
Profits up to £5,715 0%
Profits from £5,715 to £43,875 8%
Profits over £43,875 1%

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Business Records
When becoming self-employed you should try to separate your business finances from your personal finances. The best way to do this is to have a separate business bank account into which all your income can be lodged and all expenses paid.

Your basic records will normally include:

* A record of all your sales, with copies of any invoices you’ve issued. Your invoices should normally include the following information.

– a unique and sequential identifying number
– time of supply
– date of issue (if different from time of supply)
– name and address of your business
– customer’s name and address
– your VAT registration number (if VAT registered)
– a description sufficient to identify the supply
– the quantity of the goods or services, with a unit price – excluding VAT
– the rate of VAT per item (if VAT registered)
– the amount of VAT (if VAT registered)
– the rate of any cash discount

* A record of all your business purchases and expenses
* Invoices for all your business purchases and expenses, unless they’re for very small amounts
* Details of any amounts you personally pay into or take from the business
* Copies of business bank statements

HM Revenue & Customs will expect you to retain your records for at least six years as they have the right to request to view these at any time.

You will find additional advice on Budgeting and Financing on the Developmental Tools section of our site here.

Tax Obligations

Submitting your Tax Return
The tax year runs from 6 April to 5 April each year.

Once you have registered as self-employed HM Revenue & Customs will issue you with a Self-Assessment tax return every April.

Please note that particular care should be taken when considering the payment of taxes in the first year of trading.

This tax return must include details of your total income earned in the year to 5 April, and it is due for submission by the following 31 October.  However, if you or your agent files the tax return online, there is an extension for filing to 31 January of the following year.

For example: If self employed, you should have received a tax return from HM Revenue & Customs during April 2011.  You are required to provide details of the total income that you have earned in the year to 5 April 2011 on this Form. You have until 31 October 2011 to submit a manual version of this Form to HM Revenue & Customs, however, this deadline is extended to the following 31 January 2012 if you opt to file your return electronically online.


Payment of Tax
Self Assessment Tax and Class 4 NIC payments are normally payable as follows:

  • A first payment on account is due on the 31 January in the tax year to which the self assessment relates. This payment is due up front – i.e. prior to the end of the tax year.
  • A second payment on account is due on the 31 July following the end of the tax year.
  • Any balance of tax due is payable by the following 31 January.

The Self Assessment filing and payment obligations can be summarised as such:

31/01/11
05/04/11
31/07/11
31/10/11
31/01/12
I
I
I
I
I
First payment on account
End of tax year. Tax return issued by HMRC
Second payment on account
Manual tax return submitted
Online tax return submitted
I
Any balance of tax is due to be paid


Tax Rates & Personal Allowances: 

The Current tax rates are as follows:

2010/2011
First £37,400 over personal allowances 20%
£37,400 to £150,000 40%
Over £150,000 50%

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You can earn an amount up to your personal allowances which will be tax exempt. The amount of your personal allowances will depend on your personal circumstances. The current basic personal allowance is £6,475. For those earning in excess of £100,000, this personal allowance reduces by £1 for every £2 of income in excess of £100,000. Details of the current personal allowances available can be found atwww.hmrc.gov.uk/incometax/personal-allow.htm

Example: Taxable business Profits £36,000 in the tax year to 5 April 2011
Profits 36,000
Less personal allowance 6,475
Taxable 29,525
Tax due  (@ 20%) 5,905

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Averaging of Artists Profits
Artists who have fluctuating profits may have a large tax bill one year and a small tax bill the next. The March 2001 budget introduced a provision to allow artists to average their profits in successive tax years. This can help with the business cash flow, and potentially reduce the overall tax bill (Note – averaging will only lower your tax bill if your top rate of tax is different in each of the two years, or if you have not used all of your personal allowances in one year).

The profits to be averaged must be from the disposal of artistic works rather than the provision of services. Artistic works include paintings and sculptures but does not include works of craft, such as furniture.

Example: – If your taxable business profits for two years were £40,000 and £24,000
Assessable Profits
Without Averaging
With Averaging
Year 1
£40,000
£32,000
Year 2
£24,000
£32,000
(40,000 + 24,000 = 64,000)/2) = 32,000

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For further information on how averaging works and when it can be claimed see :www.hmrc.gov.uk/helpsheets/hs234.pdf

Statutory Benefits
Class 2 National Insurance contributions count towards Incapacity Benefit, Bereavement Benefits, Retirement Pension and Maternity Allowance. If you do not pay any Class 2 (or if you are an employee, Class 1 NIC) during a tax year your entitlement to the above benefits may be affected. Currently, to obtain the full state retirement pension a man must have 44 years in which he has paid National Insurance; a woman must have 39 years. If you do not have a full contribution record you are normally given the option to buy extra years to protect your state pension entitlement.

Business Expenses
There is no extensive list of business expenses that can be set against profits.

Some examples of allowable business expenses would be:

    • Materials used by your business to make goods to sell – example, canvas, paper, paint, print / sculpture materials etc
    • Agent’s fees/commission
    • Goods purchased for resale (eg. if you are selling other artists work)
    • Wages and staff costs
    • Rental of your business premises / studio
    • Electricity for heat and light
    • Legitimate business trips
    • Business telephone calls
    • Some professional fees, eg. accountants fees for the preparation of accounts. (Note – professional fees are tax deductible or not depending upon the underlying reason for which they are incurred. Some professional fees may not be tax deductible, eg. fees in relation to the acquisition of property / studio etc.)
    • Other professional fees e.g. engineers, builders, fabricators, foundries you may employ / appoint if undertaking a commission or in the creation of work
    • Motor expenses (excluding personal use)
    • Capital items such as furniture and vans or studio equipment such as cameras, video projectors etc. (A business can obtain full tax relief on capital expenditure up to £100,000. Above this amount, a writing down allowance of 25% will apply)

Examples of expenses that may not be set against profits:

  • Costs that you incur for a non-business purpose, such as your own personal expenses
  • Capital costs, such as buying a business premises
  • Business entertaining
  • Lunches or other food purchased for personal use.  The only exception to this would be the reasonable costs of meals taken in conjunction with overnight accommodation (made necessary by a legitimate business trip).

Grants, Awards and Bursaries
Tax treatment of awards depends on the individual circumstances of each participant. However, it should be noted that, in general, awards are likely to be regarded as taxable income. If appropriate your budget for a project supported by a grant should take the tax liability of the grant into account. For example, there may be occasions were a grant of £1,000 has been awarded for a project but you only spend £400 on carrying out the project. You should be aware that there are tax consequences of having made a ‘profit’ of £600. You should check the conditions of receiving the grant with the awarding body and if in doubt you should take advice from a specialist in this area.

An unsolicited prize awarded as a mark of honour, distinction or public esteem in recognition of outstanding achievement is not normally chargeable to tax.

There is an exception to these basic rules; in 1978 The Arts Council and the Inland Revenue agreed on the tax treatment of bursaries paid by the Arts Council. One of the items that was agreed upon was to exempt awards known as Buying Time Awards. These are made not to assist with a specific projects but to maintain the recipient to enable him / her to take time off to develop his / her personal talents.

Artists should note that regardless of whether a  grant or award  is tax exempt or not  the the artist  is required to record receipt of  all awards, grants,  scholarships and bursaries in their tax returns.

Late Tax Returns and Unpaid Tax 
Under self-assessment HM Revenue & Customs can impose penalties, interest and surcharges on a taxpayer who does not submit a tax return or is late in paying their tax.

Late tax returns
You will incur a penalty of £100 if your return is submitted after 31 October (the following 31 January if submitted online). A further £100 penalty will be levied if the return is over six months late.

Unpaid tax
Interest is charged on all income tax and NIC paid late. In addition, if tax for the previous year (due on 31 January) is unpaid by 28 February a surcharge of 5% of the unpaid tax is imposed. If the tax is still unpaid by 31 July a further 5% surcharge will be imposed.

Tax and National Insurance Payable, an Example.
The calculation below shows the tax and national insurance payable for a self-employed artist with profits of £30,000 in the year to 5 April 2011.

Tax Profits 30,000.00
Less personal allowance 6,475.00
Taxable 23,525.00
Tax due  (@ 20%) 4,705.00
Class 2 NIC £2.40 @ 52 weeks 124.80
Class 4 NIC Profits 30,000.00
Lower annual limit 5,715.00
Taxable 24,285.00
NIC due  (@ 8%) 1,942.80
Total Profits before Tax and NIC 30,000.00
Less Tax (4,705.00)
Less Class 2 NIC (124.80)
Less Class 4 NIC (1,942.80)
Net of all Tax and NIC 23,227.40

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By Flannigan Edmonds Bannon

Flannigan Edmonds Bannon is a Chartered Accountancy practice based in Belfast which offers a wide range of services, including:

* Management Accounting Services (bookkeeping, VAT returns, payroll services, and the preparation of management accounts).
* Compliance Services (annual accounts preparation, tax computations and returns, audit of company accounts, company secretarial function).
* Advisory Services (business development, taxation planning, corporate finance).

If you believe that you could benefit from any of the services above you can contact:.

Flannigan Edmonds Bannon
2 Donegall Square East
Belfast
BT1 5HB
T(NI): 02890 240344
T(RoI): 0044 2890 240344
E: pearl@febni.com
www.febni.com