Artists Tax: Averaging Relief

Introduction

Artists Averaging Relief is designed to help artists who have significant fluctuating income from one year to the next.

The tax consequence of this fluctuating income could be no tax to pay when profits are low, followed by paying tax the following. It also means someone moving from a basic rate tax payer to a higher rate band.

Artists Averaging Relief is available for creators of literary or artistic works. This includes authors, musicians, sculptors, and computer software writers.

How Artists Averaging Relief works

A claim is made to add together their profits for 2 years and be taxable on the average of those profits if certain conditions are met.

Averaging does not affect the amount of tax and National Insurance contributions (NICs) that has been paid in earlier years. The adjustments for all years that relate to an averaging claim are considered in your 2018 to 2019 tax and NICs. You should pay tax and NICs for earlier years in full, even if averaging reduces your profit for those years, otherwise you may have to pay interest on unpaid tax and NICs.

Who cannot claim averaging

You cannot claim averaging if your profits come from the services you provide. So, for example, you cannot claim if you’re:
• an architect whose income comes mainly from your services – even if some of your income comes from selling material protected by copyright
• a computer programmer whose income comes from the service of writing scripts or programs, not the actual works.

Conditions

Claims can be made by:
• sole traders
• partners, except people who joined or left the partnership in 2017 to 2018 or 2018 to 2019

Artists averaging relief can’t be claimed if it’s your first or final year of business.
The difference in profits of one of the tax years must be less than 75% of the profits of the other tax year, or the profits of one tax year are nil.

Profit

Profit refers to tax adjusted profits, after capital allowances and balancing charges.
If a profit has been averaged already, then the figure to use is the averaged profit.

Examples of averaging

Example 1

For example, Philias is a children’s author, tax profit are:
2018 to 2019 profit £15,000
2017 to 2018 profit £9,000
If averaging is claimed, the profit for each year becomes:
(£9,000 + £15,000) ÷ 2 = £12,000

The difference in 2018-19 profit, compared to 2017-18 is £6,000, or 67%. Philias’ 2018 to 2019 profit is reduced by £3,000 and this decrease must be entered in the relevant section of the Self-employment (full) pages or ‘Partnership’ pages.

Example 2

Freddie is a musician, earning money from royalties, tax profits are:
2018 to 2019 profit £51,000
2017 to 2018 profit £30,000
If averaging is claimed, the profit for each year becomes:
(£30,000 + £51,000) ÷ 2 = £40,500

The difference in 2018-19 profit, compared to 2017-18 is £21,000, or 70%. Philias’ 2018 to 2019 profit is reduced by £10,500 and this decrease must be entered in the relevant section of the Self-employment (full) pages or ‘Partnership’ pages.

Most importantly, if Freddie does not claim Artists Averaging Relief, he would pay tax as a higher rate tax payer, with averaging relief he pays tax at the basic rate.

Change in the profits for 2017 to 2018

Where 2017-18 profit goes up due to averaging, extra tax is charged by adjusting your tax liability for 2018 to 2019. Where 2017-18 goes down due to averaging then relief is given by reducing the 2018-19 tax liability.

Consequently,  In the above two examples 2017-18 profits increase due to averaging relief.

To calculate the 2018 to 2019 adjustment in Example 1 Phileas must work out the increase in tax and Class 4 NICs for 2017 to 2018 due to the averaging adjustment. That is to say, it is the difference between the tax and NIC on £9,000 (original profit), and £12,000 (original £9,000 + averaging adjustment £3,000).

The additional tax and NIC of £370 is entered as a tax adjustment on the 2018-19 tax return.

To calculate the 2018 to 2019 adjustment in Example 2 Freddie must work out the increase in tax and Class 4 NICs for 2017 to 2018 due to the averaging adjustment. This is the difference between the tax and NIC on £30,000 (original profit), and £40,500 (original £30,000 + averaging adjustment £10,500).

The additional tax and NIC of £3,045 is entered as a tax adjustment on the 2018-19 tax return. The 2018-19 taxable profits are £40,500 moving Freddie out of the higher rate band.

If your profits change

If the time limit for amending your tax return has not expired, you can make a claim to average the changed profits by amending your tax return, whether you originally made a claim.

Conclusion

In conclusion, artists averaging relief is important. It can move you out of a higher rate tax paying situation. It also reduces payments on account

If it feels too daunting to or you are time poor, then contact us for help.

We can have a cup of (virtual or real) coffee, biscuit and a chat to see how we can help you.

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