Tax and Self-Employment


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.

 

Self-Employment – The Advantages
Being self-employed means you are carrying on your own business rather than working for an employer. With this there are many advantages and disadvantages.

From a financial view point the primary advantage of being self-employed is that you are given greater flexibility in the expenses you can claim for tax purposes. Costs allowable under the PAYE system (where you are employed by another person or company) are very limited in comparison.

There are more tax planning opportunities available to the self-employed. For example, suppose you had intended carrying out repairs on your studio next year. You also plan to travel for 6 months and you know that you won’t be earning much income. However, this year you’re earning quite a lot and you know your income will be taxed at the higher tax rate. You could bring forward the planned renovation to the current year, as it will be tax deductible at the higher tax rate.  Being able in part to control the timing of your expenses and income allows you to maximise the tax break.

As a self-employed artist you may qualify for the Artists Tax Exemption. The artists tax exemption is only available to the self-employed – so you must be registered as self-employed to avail of this tax break. You can be in employment part-time (earning PAYE income) while also being considered self-employed for your other work, which qualifies for the Artist Tax Exemption. Note that you only receive the Artists Tax Exemption on your self-employed income – that is your creative earnings. If you have a PAYE position that involves doing creative work that would otherwise qualify for artist exemption it will fail to do so on the grounds that it is a PAYE position. A PAYE salary is liable to income tax. Your self-employed creative work will qualify for the Artists Tax Exemption.

The Artists Tax Exemption is dealt with in more detail towards the end of this article.

 

Other advantages of working for yourself include:

  • The flexibility it affords
  • Greater control over your work/life balance
  • Retaining responsibility for the direction of your career
  • Increased potential for financial reward
  • Added motivation

 

 

Self-Employment – The Challenges
One of the main challenges of being a self-employed artist is that your income can be sporadic, especially when starting out. You alone are responsible for the amount you can earn so motivation and a determination to succeed is key.

To be self-employed and run your art practice as a business you may need to broaden your range of business skills. You are responsible for every aspect of your work. For example, as self-employed individuals, artists have a duty under health and safety law to ensure that their working environment complies with health and safety legislation (you can read a text on Health and Safety for Artists on this website here). You will also need to learn about book-keeping and cash-flow management (See text on Budgeting and Financing here).

If you’re not careful you may end up spending more time running your business than you are on doing the work that attracted you to self-employment in the first place.

Once you become self-employed you fall within the provisions of self-assessment for tax purposes. This means that you are personally responsible for ensuring that your tax affairs are kept up to date.

Keeping on top of your tax obligations requires discipline. Most self-assessed taxpayers pay their income tax in one lump sum each year, which requires effective budgeting so that the cost can be met on an annual basis.

So there are many additional stresses that come with working for yourself, another one being that as a self-employed individual you cannot receive holiday or sick pay from an employer.

Ultimately, being your own boss and making a successful business for yourself is hugely rewarding, and if you’re willing to accept the additional risk and stress involved it is worth the extra effort.

 

Registering as Self-Employed

Once you become self-employed it will be necessary to register with Revenue for Income Tax. If one of the following applies;

1. You are registered for PAYE Anytime

2. You are registered for the Revenue Online Service (ROS)

3. You are represented by a Tax Agent (accountant or tax advisor)

Then you must use the Revenue eRegistration Service to do so;

Online registration must be done via ROS, which you can register for here. Once you have ROS up and running you can set up your income tax registration and manage your tax affairs using the service.

If none of the above three scenarios apply to you then you can complete a paper form TR1, which is available on the Revenue website here. Parts A & B need to be completed to register for Income Tax. This form is also used to register for VAT, PAYE (if you are an employer) and for RCT (Relevant Contracts Tax – It is used in the construction, forestry and meat processing industries and will not be relevant to most artists). Thus, much of the form will not be applicable when you first register for income tax. VAT is explained in more detail in our VAT article here.

It is advisable to register for income tax as soon as you begin trading, although the registration can be backdated. Normally you must file and pay your tax for each year by 31 October of the following year, but Revenue offer a “year’s grace” for the first year of filing. For example, if you started trading in 2013 then you are not required to file your first tax return until 31 October 2015, at which point you must also file for the tax year 2014. So in this case you will need to register in time to file your first tax returns by 31 October 2015 (Note that the Revenue Commissioners currently offer an extension to the income tax deadline of approximately two weeks if the tax return is filed and paid online, ROS.

It is important to note that although the income tax registration can be backdated as is necessary, the Artist Tax Exemption application is not as flexible. The exemption must be applied for before the end of the current year if it is to apply from the 1st January of that year. So for example if you started trading in 2014 and needed the exemption in place for that year, then you will need to register for income tax as well as apply for Artist Tax Exemption by 31 December 2014.

 


Being Employed as well as Self-Employed

There are specific Tax/PRSI/USC implications if you are both in employment as well as being self-employed. Many individuals have a PAYE position (i.e. are in employment part-time – for example teaching or theatre work) in addition to their self-employed income. This can provide a good balance, which works well in practice. The PAYE employment provides a regular income as well as entitlements to social welfare benefits that might otherwise be foregone. You can also claim a PAYE tax credit for each year of employment, which is equal to 20% of your PAYE salary in the year, subject to a maximum credit of €1,650 (as per 2014 list of tax credits).

When earning income from both PAYE/employment and self-employment it is still necessary to register for income tax under the self-assessment system. The employer will deduct the necessary PAYE/PRSI/USC from the employment income and you will need to account for any additional tax due when filing your tax return.

The total income i.e. employment and self-employed income is declared to Revenue. The tax is calculated on the total income and the taxpayer receives a credit for the deductions that the employer has taken at source. Any taxable welfare payments received in the year should also be declared on your income tax return. A list of taxable and non-taxable social welfare payments can be found here.

 


Being Unemployed as well as Self-Employed
 

As a self-employed taxpayer you may still be entitled to some form of unemployment benefit from the Department of Social Protection, and you do not need to de-register as self-employed in order to claim such benefits.

There are two separate unemployment benefits available, Jobseekers Benefit and Jobseekers Allowance.

Jobseekers Benefit is a set weekly payment, and is taxable when added to your other income in the year.  Jobseekers Allowance is means tested and is non-taxable, regardless of how much other income you earn in the year.

In order to qualify for Jobseekers Benefit you must have worked as an employee (full time or part time) in the last 4 years, paying Class A PRSI on that income.  A qualifying condition for the full rate is that you must be available for full time work.  More details on Jobseekers Benefit, including further conditions and current rates, can be found here.

Self-employed taxpayers pay Class S PRSI, which only covers you for certain social welfare payments.  It does not entitle you for Jobseeker’s Benefit.  For this reason, and also for the fact that you may not be available for full time work as a self-employed individual, it is possible that you do not qualify for full Jobseekers Benefit.

If you do not qualify for Jobseekers Benefit, or if you only qualify for a reduced rate, you can ask to be assessed for Jobseekers Allowance, which may be more beneficial to your circumstances.  Jobseekers Allowance also has the advantage that it is not taxable when added to any other income you might earn in the year.

In order to qualify for Jobseekers Allowance your means must be below a certain level to qualify.  As well as assessing your existing household income, the Department of Social Protection will also ask for details on any assets, investments, savings…etc that you own.  This is known as means testing, the conditions of which can be found here.

More details on Jobseekers Allowance and current rates can be found here.

The Citizen’s Information Board has pooled all of its information for self-employed individuals on a microsite www.selfemployedsupports.ie, which is quite a useful resource.

The Department of Social Protection has also introduced a new service called Intreo, which will provide a single point of contact for all employment/unemployment and income supports.  Full details of the service can be found here. If you think you may be entitled to some form of unemployment benefit you should contact your local Intreo office, which can be located through here.

 

 

Books and Records

Once you become self-employed it is necessary to maintain proper books and records to enable you to make your returns to Revenue. This is a requirement according to Revenue legislation, and becomes important if your business and tax affairs are ever selected for a Revenue audit. More details on this here.

 

Recording Income & Expenses

When invoicing clients the following information should be included:

– your name and address

– name and address of the customer

– date of issue of the invoice

– date of supply of the goods or services

– full description of the goods or services

– the quantity or volume of the goods supplied

– cost of the goods or services

– sequential invoice number

As well as keeping copies of all invoices issued and received you will need to record the details of all your sales and purchases. Details of how to record your financial information can be found in the ‘Analysing Payments & Receipts’ section of the article on ‘Budgeting and Financing’ by David McConnell which you can read here.

 

Allowable Expenses

You can claim for any business expense that you have incurred in order to earn your profits. These expenses are normally referred to as revenue expenditure. Revenue expenditure can be seen as the day to day running costs of your business, and may include such items as:

– Art Materials

– Training Specific to your trade

– Telephone/internet

– Office/computer supplies

– Rent of business/studio space

– Professional/legal/accounting fees

– Agent commission

– Research – books, journals, subscriptions etc

– Visits to museums/galleries

– Postage/couriers

– Motor expenses

– Travel & subsistence

 

Disallowed Expenses

Any expense, not wholly and exclusively incurred for the purposes of your profession is not allowed. This would include any private or domestic expenditure. For example food & clothing (except protective clothing) cannot be claimed. Also, business entertainment expenditure – i.e. provision of accommodation, food, drink or any other form of hospitality to clients or buyers is specifically disallowed.

 

Mixed Expenses

Where expenditure relates to both business and private use, only that part which relates to your business will be allowed. Examples of such expenditure are rent, electricity, telephone charges etc., where a business is operated from home. These expenses will need to be apportioned to exclude the element of private use.

Revenue will accept estimates for business use. For example if someone works from home they would typically claim 1/3 of their light and heat bills as business expenditure.

 

Motor Expenses

You can claim a deduction for the running expenses of a motor vehicle used for business purposes. This includes a suitable portion of insurance, motor tax, NCT and general maintenance, as well as petrol and diesel. However if you have a regular place of work then journeys between here and home are normally treated as private and not business.

 

Capital Expenditure

Expenditure is regarded as ‘capital’ if it has been spent on acquiring or altering assets which are of lasting use in your business, for example, the purchase of a computer or other equipment. You cannot deduct the cost of this type of expenditure in arriving at your taxable profit. You can, however, claim capital allowances on expenditure incurred on items such as office equipment and business vehicles.

Capital Allowances are calculated at a rate of 12.5% (per year) of the net cost. The allowance is granted for 8 years until the full cost of the asset has been claimed. For example, if you purchase a computer for €1,600 in 2014 you can claim €200 (12.5% of 1600) of the cost as a tax-deductible expense each year from 2014 to 2021 inclusive. By claiming €200 each year for 8 years you are getting a deduction for the full €1,600 paid for the computer. Note that in the first year of purchase a full capital allowance is given regardless of when in the year the asset was purchased. As long as it was in use on the last day of your accounting year the full allowance is afforded at 12.5% for that year.

 

Keeping Books & Records

Under the self-assessment system you do not have to present your books and records to Revenue when filing your tax return.  When you submit a return you must give details of your income and expenditure, but you do not provide any supporting documentation.  However you must retain your books and records for 7 years as Revenue have the right to audit your return and request access to your accounting information at any time during this period.  In the event of an audit Revenue will want to see sales invoices, purchase invoices/receipts bank statements and credit card statements.

 

Preparing Your Accounts

Once you have recorded your income and expenditure you will be in a position to prepare your accounts.  This is simply a matter of transferring your totals from your sales and purchases books into an income and expenditure account.  The result should look something like the example below.  Once done, you are ready to input the figures onto your tax return.

MS. ARTIST
INCOME & EXPENDITURE ACCOUNT
YEAR ENDED 31st DECEMBER 2013
Income
Non-PAYE Teaching 8,000
Art Sales 12,000 20,000
Expenditure
Materials 1,200
Research 300
Utilities 250
Commission 600
Telephone 1,200
Motor Expenses 600
Subsistence 800 4,950
Net Profit 15,050
Capital Allowance @ 12.5%
(Computer Bought for €1,600)
200
Profit After Capital Allowances 14,850


Filing Your Return

The due date for filing your 2013 income tax return is 31 October 2014, with the availability of an approx. two week extension if return is filed and paid online via www.ros.ie. Further benefits of using ROS include quicker filing/processing times, more tailored and straightforward forms to complete, and access to your tax calculation before filing your return. 

The tax return itself is filed on a ‘Form 11’, the paper version of which is available on the Revenue website here (for 2013). Revenue also provide a useful guide to completing the form which is updated annually. The 2013 guide is available here.

 

Calculating your tax – Rates & Allowances
There are 2 concepts to understand in calculating your income tax.  These are “Tax Bands” and “Tax Credits”.


Tax Bands

There are two income tax rates. The standard rate is 20% and the higher rate is 40%. In 2015 & 2016, for a single person the first €33,800 of income is taxable at the lower rate and the balance is taxable at the higher rate. The tax band represents the amount that is taxable at the lower rate. This is also known as your “cut-off point”.

For married people tax bands and tax credits can be transferred between spouses so they are best utilised for tax purposes.

 

Tax Credits

Tax credits are offset against the income tax payable. There is a standard personal tax credit of €1,650 for 2015 & 2016. A married couple would have a joint personal tax credit of €3,300 (€1,650 x 2) that can be divided between the spouses in the most tax efficient manner. 

A full list of tax credits and the various tax bands for 2015 & 2016 can be found here. The Revenue guide to taxation of married people is available here. 

Tax bands and credits are best illustrated by way of an example.
 

 

Income Tax Calculation for 2013 (assuming single person & ignoring Universal Social Charge/PRSI)

Taxable Profits (from trade)
€40,000
32,800 @ 20%
6,560
7,200 @ 41% 2,952
Total Tax
9,512
Less Tax Credit
(1,650)
Net Tax
7,862


Universal Social Charge (USC)

The Universal Social Charge came into effect on 1st January 2011, and it replaces the old income levy and health levy. It is payable on gross income, after relief for most capital allowances, but before pension contributions. It is also payable on artist exempt profits, but is not charged on social welfare payments.

All individuals pay the USC if their income exceeds €10,036 per annum. The rates and thresholds for self-employed individuals in 2016 are as follows:

• 1% – on income up to €12,012 per annum

• 3% – on income between €12,012 and €18,668 per annum

• 5.5% – on income between €18,668 and €70,044 per annum

• 8% – on income over €70,044 per annum

 


Exemptions to USC

Those earning less than €13,000 per year are exempt from the USC.

All social welfare payments are exempt from the USC.

Self-employed individuals aged over 70, and those under 70 who hold a full medical card, pay a top rate of the USC of 7%. If someone over 70 earns more than €12,012 per annum then they are charged 1% on the first €12,012 as normal, 3% on income above €12,012

Full details on the Universal Social Charge, including FAQs and a list of exemptions, can be found here.

 


Penalties & Interest

Failure to file an income tax return on time will lead to a tax-geared penalty. Late filing within 2 months leads to a 5% penalty and after 2 months the penalty is 10%. Revenue can also charge interest on late payments of tax at a rate of approx. 8% per annum.
 


Preliminary Tax
 

The 31 October deadline is also the due date for preliminary tax (extended for electronic filing). Preliminary tax is a payment of tax, on account, for the current year. PAYE workers have their income taxed as they earn it so there would be a huge cashflow advantage to self-employed people if they didn’t have to pay tax on earnings until 10 months after their year end. 

To redress this, Revenue attempt to tax a self-employed person’s income in the year they earn it by way of preliminary tax. So preliminary tax for 2014 is due by 31 October 2014 and it is fully refundable to the extent that it covers the final tax liability for the year. If preliminary tax does not cover the final liability for 2014 then the balance is payable by 31 October 2015 (extended for ROS filing). 

In order to avoid a potential charge to interest (approx. 8% per annum) on any underpayment, Revenue offer two main methods to calculate preliminary tax;

1. To pay preliminary tax at 100% of the prior year’s liability

– This is the most common method, and guarantees that, even if you underpay in preliminary tax, you will be considered to have met your preliminary tax obligation, and avoid any potential charge to interest. Many taxpayers prefer this method for the certainty it provides.

2. To pay preliminary tax at 90% of the actual current year liability

– This method is normally used if the taxpayer is confident that their tax liability for the current year will be a lot less than the tax liability of the prior year (for which they are filing). Option 1 would amount to an overpayment of preliminary tax, and would likely be an amount that they could ill afford (if their tax liability is due to decrease, then this is probably due to the fact that they have earned less in the year, meaning they cannot afford to be paying tax at the previous year’s rate). 

– The problem with option 2 is that you need to make the preliminary tax decision by 31 October in the year. With potentially two months still left in the year it can be difficult to make an accurate estimate of what your tax liability might be for the year. 

It may be best to explain this in more detail by way of an example. Let’s take an individual who has been trading for a number of years and their income tax liabilities have been calculated as follows: 

 

Tax Year
Tax Liability
2012
1,500
2013
5,500
2014
3,500

The 2016 income tax is due for payment on 31 October 2017. This is also the due date for preliminary tax for 2017. For 2017’s preliminary tax we can pay either 100% of the 2016 liability (€1,500) or 90% of the 2017 liability (€4,950). 100% of the 2016 liability is less so that is the minimum amount we should pay. The total paid at 31 October 2017 would be €3,000, being €1,500 for the 2016 liability (assuming no preliminary tax had been paid already for that year) and €1,500 towards 2017.

The balance of the 2017 income tax then falls due on 31 October 2018, which is also the due date for 2018’s preliminary tax. The balance owed for 2017 is €4,000, being €5,500 less the €1,500 paid in October 2017. The preliminary tax for 2018 again can be 100% of the 2017 liability (€5,500) or 90% of the 2018 liability (€3,150). As 90% of the 2016 liability is less this is the amount we might want to pay. The total payable on 31st October 2018 will therefore be €7,150.

In practice you will not know the exact 2018 liability at the time of filing in October 2018, so a conservative estimate should be made at that point. For example some people might aim to cover 95% of the estimated liability instead of 90%, just to be safe.

When the final liability for 2018 is filed in October 2019, Revenue will look at the payments retrospectively to see if either 90% of the 2018 liability, or 100% of the 2017 liability, was covered by preliminary tax. If neither figure was met then the taxpayer faces a potential interest charge at approx. 8% per annum on the full underpayment.

 

Notice of Assessment

Once you have filed your income tax return Revenue will issue you with a notice of assessment. This will reflect the figures you have submitted on your “Form 11” and show Revenue’s calculation of your Income Tax and PRSI/USC for the year under review, along with any balance of tax due or refundable.

 

 

PRSI and Social Insurance Benefits

Pay Related Social Insurance (PRSI)

PRSI payments go into the Social Insurance Fund which helps pay for Social Welfare benefits and pensions.

‘Reckonable income’ for the purposes of PRSI is profit after capital allowances but before reliefs and deductions. The current rate of PRSI is 4%, which is charged on all reckonable income, including artist exempt income.

Using the same example as before, but this time including USC & PRSI

 

Income Tax Calculation for 2013 (single person)

Taxable Profits (from trade)
€40,000
32,800 @ 20% 6,560
7,200 @ 41% 2,952
Total Tax 9,512
Less Tax Credit (1,650)
Net Tax 7,862
PRSI: 40,000 @ 4% 1,600
USC: 10,036 @ 2% 201
5,980 @ 4% 239
23,984 @ 7% 1,679
Total USC: 2,119
Total Tax, PRSI & USC:
11,581

 

Minimum PRSI Payment

Anyone with self-employed income in excess of €5,000 must pay at least the minimum PRSI of €253. If 4% of their reckonable income is greater than €253 then they will be liable for the larger amount. In summary the PRSI liabilities are as follows: 

 

Taxable income PRSI payable
Less than €5,000 Nil
€5,000 – 6,325 €253
> €,6325 4% of reckonable income

Social insurance benefits

There are a wide range of benefits that are available to people who have paid social insurance. Entitlement to these benefits is dependent on a number of conditions other than the social insurance requirements. The payments that are available include: 

• Jobseeker’s Benefit

• Illness Benefit

• Maternity Benefit

• Adoptive Benefit

• Health and Safety Benefit

• Invalidity Pension

• Widow’s/Widowers Contributory Pension

• Guardian’s Payment (Contributory)

• State Pension (Contributory)

• State Pension (Transition)

• Bereavement Grant

• Treatment Benefit

• Occupational Injuries Benefit

• Carer’s Benefit

 

It should be noted that some social welfare benefits are taxable and some are not. A list of benefits and their tax status is available here. The USC is not chargeable on any social welfare payments. 

 

Voluntary Contributions

If your income is below €5,000 you will not have to pay PRSI, and if this is the case you might want to consider making voluntary contributions. These allow you to remain insured through times when you are not earning, and maintain entitlement to some social welfare benefits. Voluntary contributions cover for long-term benefits, such as State Pension, but do not cover short-term benefits such as those for illness, unemployment, maternity, occupational injuries and dental and optical treatment. More information on the scheme, and details on how to apply, are here.  The application form can be found here.

There are some restrictions on how and when you can make voluntary contributions. Below is an extract from the Welfare website that explains these in more detail;

To become a voluntary contributor you must:

• have paid at least 364 weeks [7 years] PRSI in either employment or self-employment

and

• apply within 12 months of the end of the year during which you last paid compulsory insurance or you were last awarded a credited contribution

and

• agree to pay voluntary contributions from the start of the contribution week that follows the week in which you leave compulsory insurance.

The amount of contributions required to become a voluntary contributor on or after 6 April 2014 are as follows:

• you must have previously paid 468 weeks [9 years] PRSI if becoming a voluntary contributor on or after 6 April 2014

• you must have previously paid 520 weeks [10 years] PRSI if becoming a voluntary contributor on or after 6 April 2015.

 

Artists Tax Exemption

The Artists Tax Exemption Scheme allows earnings made by artists from the sale of original and creative works to be exempt from income tax. It applies to visual artists, sculptors, composers of music, and writers.

The scheme is governed by Section 195 of the Taxes Consolidation Act, 1997. In order to qualify the Revenue Commissioners must make a determination that the works are – a) original; and b) generally recognised as having cultural or artistic merit.

The exemption granted applies only to income derived from the sale of these creative and original works. The Act specifically lists these works as: a book or other writing, a play, a musical composition, a painting or other like picture and a sculpture.

More info on the Artists Tax Exemption Scheme is available on the Revenue website here.

Note that the article makes reference to the High Income Individuals Restriction, which came into effect in 2007. At the time this restricted how much income that artists could claim as tax free. The €250,000 restriction (referred to in article) remained in effect from 2007 – 2009, and in 2010 it was restricted further, to €125,000 and €80,000 under certain circumstances. From 2011 onwards the High Income Individuals Restriction does not apply to the Artist Tax Exemption.

Instead, from 1st January 2011, there is a separate annual cap on Artist Exemption of €40,000. Any artist exempt profits above this threshold are taxed as normal.

 

Payments to Artists that are Exempt from Income Tax

The following payments are exempt from tax from when they are made to an artist whose has received an Artists Exemption: 

• Arts Council bursaries

• Cnuas payments made under the Aosdana Scheme

• Artists’ Resale Right Royalties

• Payments from the sale of works that are considered eligible under the Artists Exemption scheme

 

How to Apply

To apply for Artists Exemption, you should submit a claim form here to the Revenue Commissioners, together with samples of your work and any supporting documentation that you consider appropriate.

 

You will need the following samples and supporting documents for the following categories:

• Books or other writing – 1 published copy of the book

• Plays – a copy of the play, together with a production contract

• Musical compositions – CDs or cassettes

• Paintings or other similar pictures- 8/10 photographs or slides, invoices and your CV, if available

• Sculptures – 8/10 photographs or slides, invoices and your CV, if available. 

 


Income Tax Requirements

You must return your Artist Exempt profit figure on your Form 11 income tax return. Note that the only relief available on qualifying artist exempt profits is that of income tax (20% / 41% rate).

PRSI and USC are both payable on all income, including your artist exempt profits. So for artist exempt profits under €40,000 (but above €5,000) the rates of deductions would be as follows:

 

First €10,036 6% (2% USC + 4% PRSI)
Next €5,980 8%      (4% USC + 4% PRSI)
Next €23,984 11%    (7% USC + 4% PRSI)

These charges are collected as normal through your Form 11 income tax return (and should be included in your preliminary tax calculations). An example of how a calculation of income tax, PRSI and USC might look in 2013 for an artist with exempt profits of €90,000 is laid out below:

Total Artist Profits €90,000
Artist Exempt Profits Restricted (€40,000)
Taxable Portion of Profits €50,000
Taxed: 32,8000 @ 20% 6,560
17,200 @ 41% 7,052
Total Tax 13,612
Less Tax Credit (1,650)
Net Tax 11,962
PRSI: 90,000 @ 4% 3,600
USC: 10,036 @ 2% 201
5,980 @ 4% 239
73,984 @ 7% 5,179
Total USC: 5,619
Total Tax, PRSI & USC 21,181


Apportioning Artist Exempt Income.

Where you have multiple income streams and not all of them qualify for Artist Exemption then you will need to apportion your profit on a pro-rata basis to get the taxable profit and artist exempt figure.

From the income and expenditure example in the “Preparing Your Accounts” section of this article the tax-exempt artist income was €12,000 and the taxable teaching income was €8,000. Assuming the artist income qualifies for tax exemption we need to apportion the total profit to find the taxable profit for the year. We do this by taking the final profit figure and dividing it by the total income. The result is then multiplied by the total taxable income (in this example the teaching income). This gives us the taxable profit for the year as follows:

 

Profit x Taxable Income = Taxable Profit
Total Income
€14, 850
x €8,000 = €5940
€20,000
The tax-exempt portion of the profit is €8,910, calculated as follows:
Profit
x Tax-exempt Income = Tax-exempt Profit
Total Income
€14,850
x €12,000 = €8,910
€20,000
The taxable profit and the tax-exempt profit will equal the total profit i.e. €5,940 + €8,910 = €14,850


Awards and Grants

There is no uniform treatment for all grants. Most grants & awards are likely to be regarded as taxable income although there are exceptions. Where there is any doubt it is advisable to seek confirmation from the grant provider, the Revenue Commissioners or a tax advisor/ accountant.

Some general points to note are:

If you have the Artist’s Tax Exemption then the Arts Councils Bursary Awards and Aosdána Cnuas payments will be exempt from income tax. Bursary Awards and Aosdána Cnuas payments are provided by the Arts Council in order to allow an artist to ‘buy time’ rather than for spend on a defined project. They represent a direct personal income to the artist and they have been officially approved by the Revenue Commissioners as being eligible for exemption from income tax.

Project grants (ie. where you are awarded a grant to make a particular project happen rather than the grant being given simply for your own personal benefit) are different and technically they are subject to tax. But remember that only your profits are subject to tax. For the most part a project grant will be offset against the cost of undertaking the project so no profit will arise to be taxed upon. However, there may be occasions where a grant of €1,000 has been awarded for a project but you only spend €700 on carrying out the project. You should be aware that there are tax consequences of having made a ‘profit’ of €300. Similarly if you pay yourself a fee out of the grant then that will be subject to tax too.

So if the income from the award exceeds the actual costs incurred the balance will be taxable. If the expenses to which the grant related exceed the income the additional cost (or “losses”) can be claimed against other income in the period.

To ensure compliance you should check the conditions of receiving the grant or award with the awarding body and if in doubt you should take advice from a specialist in this area.

Income arising from a scholarship held by a person receiving full-time instruction is exempt from tax.

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

 


Capital and Revenue Grants

Just as there is capital and revenue expenditure there are capital and revenue grants.

A revenue grant is one that is provided to fund revenue expenditure. For example a grant provided for the purpose of funding a research trip would be a Revenue grant. The income from a Revenue grant is allocated in full to the year it is received and the expenditure to which it relates is directly offset against it.

A capital grant is a grant that is provided for the purpose of capital expenditure e.g. a grant to fund the furnishing of a studio. As the capital expenditure must be claimed at a rate of 12.5% over 8 years as explained earlier in this article, the capital grant is also amortised over the same period.

So let’s assume you have received a grant of €10,000 towards the fit-out of a studio. The total cost of the fit-out came to €16,000. Each year for 8 years you need to record grant income of €1,250 and claim capital allowances of €2,000. This effectively means you are getting a tax deduction of €750 over 8 years which comes to a total of €6,000 being the difference between the actual cost to you and the grant income.

The safest way to deal with grants and awards is to assume that they are taxable until it can be shown that they are not.

 

Do You Need An Accountant?

An accountant is not a requirement. Revenue will accept returns direct from all members of the public. The main factors you would probably need to consider are:

1. How comfortable you are preparing you own returns

2. The complexity of your return

3. The potential liability if the return is wrong

4. The cost of engaging an accountant

5. The time being taken up by preparing your own returns

6. Are there any other parties that require accountant’s confirmations?

7. General awareness of other business issues.

 

If you are not sure about your return, but would like to prepare it yourself I would recommend that you contact an accountant with a view to looking over the return once you have prepared it, especially if it is your first tax return. An accountant should be able to quote a reasonable fee for simply reviewing a tax return.

If all of your income qualifies for Artist Exemption then your liability for an incorrect return will probably be relatively small. If for example you don’t claim all your expenses correctly and consequently overstate your profit by €2,000 your additional liability will be a maximum of €280 (14% – 10% top rate USC plus 4% PRSI). This is less than what some accountants might charge for completion of accounts and income tax return for one year.

If your income is not artist exempt and you overstate profit by €2,000 then you might be paying as much as €1,100 (55% – 41% top rate tax, 10% top rate USC plus 4% PRSI) more than you should.

For people in all businesses, including artists, bookkeeping and preparing tax returns isn’t a value adding activity. The time spent doing these tasks is always better employed in the studio. The cost of an accountant should be weighed against the time consumed by doing the work yourself.

There are 3rd parties other than Revenue that may require you to have an accountant from time to time. The most obvious example is your bankers. When looking for loans or mortgages, banks will frequently require an accountant’s certification of your income. Typically they look to certify 3 year’s accounts for mortgages. However this can be often done on an ad-hoc basis.

Finally, an advantage of having an accountant is that they will be aware of other issues that might arise, and with the constant changes to tax laws and exemptions in particular it may be useful to have someone at hand who is up to speed on these issues.

 

By Gaby Smyth & Company
Gaby Smyth & Company is a chartered accountancy practice located in Ballsbridge, Dublin, which specialises in the music, theatre, film and visual arts. The firm offers taxation, audit and management accounting services. Gaby Smyth has delivered courses in taxation and accounting for Dublin Business School, the Institute of Bankers, AIB Corporate and Treasury, and Goodbody Stockbrokers. In addition, the firm has run courses specialising in accounting and tax in the arts for Music Network, Blackchurch Print Studio, Fire Station Artists Studios, Visual Artists Ireland and various county and city councils throughout the country.