DOING THE BUSINESS

Big George's Guide To Commercial Success: Dealing with the Inland Revenue

Published in SOS December 1999
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Music Business

It's easy to bury your head in the sand when it comes to tax matters but, as Big George explains, there are better ways to deal with the Inland Revenue...

They (whoever 'they' are) reckon there are two inevitabilities in life: death and taxes. I imagine we've all, at one time or another in our musical career, died on stage, or had our latest track met with deathly silence. So, if we're aware of how to deal with the Grim Reaper, what about when the taxman cometh?

Whether you're on benefits, on a training scheme, in full-time education or working as a supermarket shelf-filler, if you earn money from your musical exploits - and that includes gigs, teaching, hiring out your setup, selling your music to someone else, and so on - you're legally bound to tell the Inland Revenue how much you make. It's your responsibility to inform them, not theirs to inform you. And be warned, they'll go to the ends of the Earth to get every penny you owe them!

If your sole income is from music and you're self-employed, you'll already be aware of Self-Assessment Forms. If not, you'll have to ask for one to be sent to you. The deadlines that Hector, the scary bowler-hatted TV cartoon, is always shouting about are the 30th September and 31st January. Now don't get confused, but those dates have nothing to do with the end of the tax year, which is the 6th of April, or your tax year, which can be any date you like! (Although once you've picked it, there's no going back, unless material circumstances dictate that it'd be financially prudent to your fiscal position to re-evaluate...)

Nett Or Gross     Richard Branson says he still doesn't know the difference between gross and nett. If that's true, and not a sad piece of endearing media hype, is he really the man you want to make the condoms to protect you on your train journey to catch a plane? It's simple: Gross (or turnover) is the entire amount you get for all the paid work you do. Nett is what's left after you've deducted all the expenses. So, for instance, let's suppose you get £1000 for a job, and the studio costs you £300, the drummer charges £150 (cheap), the tape stock is £30, delivery costs £12, a tuner battery £3, a DAT £5, the cab fare to and from the studio was £27 and the train fare to the meeting to discuss the job was £13. In this case, the gross is £1000 and the nett is £460. Now then, anyone fancy a can of Cola?

You think that's confusing? It's a total nightmare of balancing columns and deducting allowances. Or is it? It all depends on how much you're making. If it's more than two grand a week, I suggest you get an accountant to read this article for you. Whereas if it's £50 here and £250 there or thereabouts, the need for an accountant is maybe an extravagant deduction too far - it's your call. Doing your own tax return is a doddle, as long as you keep records of all money coming in and going out. You'll need to keep these for at least six years in case they want to investigate you. Which they won't, just as long as you're not hiding anything from them, like cash payments from a gig, or insurance settlements.

The language the Inland Revenue use can make it feel like you owe them one million pounds and it's due in five minutes or you'll go to prison for the rest of your life. But that's just their way, and once you get to know them, they aren't so bad. And their vocabulary gets easier to understand. Let's start with the basics...

'Turnover' is all the money you receive for your services. 'Expenditure' is a bit more complicated, but here's the gist of it. You can claim for anything you use in the course of earning money (but you must keep the receipts). This means that if you use the phone for a business call, you can claim a percentage of the phone bill. Likewise, if you need to travel to a business meeting, or a recording session, your travel expenses can be claimed. There's also something called 'Capital Allowance' - see box for full details.

If you're in any doubt as to whether something is allowable as an outgoing expense, call your local tax office, they'll be happy to advise you. As for the dates that are postered everywhere:

• September 30th is the last day you can send in your tax form and have the Tax office guarantee to calculate your bill.
• January 31st is the last day you can put in your calculated Self-Assessment form without getting a fine of £100 (and that's only the beginning of the fines).
• April 6th is the beginning of what they call the tax year.
• Your tax year can start on any date; they'll advise you on that too, but a second opinion is never a bad thing to get.

Then it's just a simple matter of working out what's come in, what it's cost you to get that money in, and the difference between the two (turnover minus expenditure equals taxable income, less personal allowances). If you've kept the receipts and written everything down, it shouldn't take you more than a full day or so a year to sort it out for yourself. If, after reading this column and all the little calculus boxes, you feel you'll definitely need an accountant, you'll still need to keep yourself in good order book-keeping-wise.

If your turnover is less than £15,000 per year, all the Inland Revenue want from you are what they call 'three-line accounts'.

• Line 1: Your turnover.
• Line 2: Your expenditure including capital allowances (see box).
• Line 3: Your profit (Line 1 minus Line 2).

So if Line 1 (your turnover) is £14,500 and Line 2 (your expenditure) is £8,000, then Line 3 will be £6,500. Then you subtract your personal allowance, which is £4,335, leaving a taxable profit of £2,165. Now it starts to get a little complex, as the first £1,500 of this is taxed at 10 percent, while from £1,500 to £28,000 it's taxed at 23 percent. If your profit is over £28,000 you're at the top rate of 40 percent, and to reach that level of profit you must be coining it in. The tax due on our example taxable income of £2165 is: 10 percent of £1,500 (=£150) and 23 percent of the remaining £665 (=£152.95), making a grand total of £302.95 to pay for the entire year. But if you're married, you are allowed an extra £197 off your bill, taking that figure down to £105.95.

If you earn more than £15,000 you'll need to go into your turnover and expenditure in a little more detail. Which will only get really painful if your accounts are in bad shape or the Inland Revenue have good reason to believe that you're defrauding them. Remember, the tax due on £50 is only £11.50 tops, but having one of Her Majesty's tax officers looking closely at your affairs is a major drag - even for the most honest of us. It just isn't worth it.

Writing down the nooks and crannies of your music-making existence, however much you make, is something worth getting used to. Apart from income tax, there are business plans, loan applications and arts grants all waiting for you to take full advantage of their financial generosity. We'll look at those next month. If you have anything you think I ought to look into on your behalf, write to me here at SOS or email big.george@soundonsound.com. See you next month!