‘One for you, nineteen for me’

George Harrison's pre-decimalisation crie de coeur is everyone's concern, particularly at this time of the year and especially in the arts when organisations and individuals are busy making up and presenting, accounts and budgets, applying for and awaiting receipt of grants, subsidies, awards and bursaries; and drawing up returns for the taxman.

Taxation is a highly technical legal/administrative/accountancy exercise, and working artists – like anyone else in business on their own – must draw up and present their accounts to tax inspectors for income tax assessment once a year. Many, however, do not know how to do this. Of course, there are accountants and some do specialise in artists' taxation, but their services must be paid for and can be expensive. As a result, many artists – fighting hard against losses anyway – do not employ accountants or anyone else to present their accounts; and many make no returns.

Artists could handle their own tax affairs and/or help to reduce the workload (and expenses) of their accountants, if they had some basic information. The first thing to do – and this applies to all who regard themselves as professional working artists, whether or not they do work 'on the side' to survive – is to keep records of all money received and all payments made in connection with their work. This is crucial, for without these it will be impossible to prepare an accurate and credible profit/loss account for the taxman even if it is inevitable that a loss will be shown; this account must be drawn up.

Very simply, the profit/loss account should list all the money received and from what source, and all payments made and to whom, during that tax year; add up each list, subtract one from the other = profit/loss. For example, money may come in from sales, commissions, lectures, copyright royalties, publishing fees, reproduction fees, grants, awards, bursaries, hiring fees, re-sale royalties and so on; and maybe spent on materials, framing, development and printing, transport, travelling expenses, private views, publicity, studio rent, rates, maintenance, heating, lighting, telephone, books, periodicals, professional advice and help and any other payment made necessary by the work of an artist.

The taxman may not be interested in all moneys received if, for example from teaching, tax has already been paid; or if the money has no connection with work as an artist. However, any money received which the artist regards as deriving from work as an artist should be put down and argued about later. With regard to grants, awards and bursaries, in the past they have usually been regarded as taxable income since they would only have been awarded to professional artists in connection with their work; at present the situation is under review and decisions about liability and assessment remain unresolved. The Arts Council of Great Britain is currently involved in discussions with the Inland Revenue about this whole question. It is expected that the matter will be resolved soon.

Conversely, the taxman may not allow the artist to claim certain types of expenditure or may reduce the amount claimed (that is why receipts are so important). For this reason, advice and help may be needed to persuade the inspector. Moreover, the taxman may decide that because there has been a loss over the year, the artist is not a professional, but merely a 'hobbyist' – a very important distinction which can and does have serious consequences. If regarded as a professional, even though loss-making, the taxman can allow those losses to be offset against any tax payable on other “non-artistic” income earned during that year; or can allow those losses to be carried forward to the next year to be off-set against possible profits. But if treated as a hobbyist – and many are – these arrangements cannot be made. Since most artists do make losses, particularly in early years, it is essential that the taxman is able to recognise and deal with an artist as a professional. This may take some persuasion, and is another reason why artists often require, expert guidance and help.

However, artists can help themselves and each other enormously. If everyone made tax, returns every year, even showing losses (how many rich artists do you know?), it would show the tax authorities that there exists a substantial body of artists working, in this country as professionals who should be treated as such. Furthermore, for those artists who do ignore these matters, completely (and many do), they may find themselves having to dig back through six years of receipts and bank statements (if they have them) in order to prove to the taxman that the current year of plenty really is an exception and that the past few years showed losses, even though no returns were made.

What can help is the use of receipts, bills of sale, written agreements and other documentation whenever a transaction is made where money is involved. As always, it is a question of professionalism and that is for each artist to decide. If advice and help is needed, it is available through accountants, tax consultants and lawyers. One thing that often happens is that the tax saved by employing an accountant is more than the fee for his services. It's a thought.

© Henry Lydiate 1978

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This article is from the Artlaw Archive of Henry Lydiate's columns published in Art Monthly since 1976, and may contain out of date material. The article is for information only, and not for the purpose of providing legal advice. Readers should consult a solicitor for legal advice on specific matters. Artists can get free online legal information from Artquest.