Why an author shouldn’t give their copyright to their company
Olivia is an author in her spare time and has written her first book. She’s thrilled that she’s been offered a publishing deal to pay her an advance of £50,000. Then she discovers that the £50,000 will be added to her income for the year. As she already has a good income from her job she’ll have to pay higher rate tax of 40% on the £50,000 advance. A whopping £20,000. To save tax she sets up a limited company to sign up to the publishing deal. The company pays tax on the advance of 19%. She doesn’t need the cash at the moment so it seems like the perfect solution saving £10,500.
Unfortunately HMRC decide to look into the transaction.
HMRC write to Olivia to explain that the gift of copyright from an author to their own company is taxed at an open market valuation. The HMRC Valuation Team have estimated the market value at £75,000 (based on the initial advance plus future royalties). They assess her for this tax together with interest and surcharges for late payment. They also levy a penalty of 15% for a ‘careless prompted’ error.
Even worse for Olivia is that the tax position for her company is unchanged. The company is still liable for the same amount of tax as before.
The tax bill she is faced with is:
Corporation tax on £50,000 at 19% = £9,500
Income tax on £75,000 at 40% = £30,000
Penalty on careless error at 15% = £4,500
Surcharge on late payment of tax at 5% = £1,500
And that’s not the end of the story. Olivia now has to take all the money out of the company to pay the unexpected tax bill. She pays a dividend of £40,500 on which she has to pay income tax of 32.5% totalling £13,162. The total taxes, surcharges and penalties on her £50,000 total £58,662. A real tax horror show that doesn’t even factor in the professional fees in setting up the company and dealing with the tax enquiry or the worry and hassle suffered.
This situation is one we see too often and it’s relatively easy to avoid.
A limited company can still be a for great tax planning for an author – it’s just that care needs to be taken to get the details correct.
For specialist help on tax for authors please get in touch.