Taxation of Prizes and Grants
Booker, Whitbread, Turner, John Moores – are the winners of those prizes liable to pay income tax? What about other minor awards and prizes given by public and private donors? What about competitions,’buying time’ awards, bursaries and artist in residence schemes, which are common features of the financial framework supporting artists in the UK?
The law governing these situations is interpreted and applied to such recipients by the Inland Revenue, initially. If artist tax payers are aggrieved by an Inspector’s assessment decision, they can appeal to the Commissioners of Income Tax: the General Commissioners who are lay-people advised by a qualified professional Clerk; or to the Special Commissioners, who are professional judges.
Most appeals are heard by General Commissioners: costs of such proceedings are usually modest, and hearings reasonably quick: but the results have no wider impact than upon the Inspector and taxpayer concerned. Less frequently, appeals are heard by the Special Commissioners: costs of such proceedings can be substantial – there is a court hearing where lawyers on both sides are usually included – and hearings can take considerable time to arrange; the results, however, are legal judgments, reported in the official Law Reports and published generally – because they have wider legal effect. The judgments of Special Commissioners are binding on all Inspectors of Tax unless and until changed by more superior courts such as the Court of Appeal orHouse of Lords – or by Parliament through new legislation. What, therefore, is the current law governing prizes and awards to artists? What does the relevant legislation say? What do relevant legal judgments say? And what is the custom and practice of Inspectors of Taxes? The starting point is statute: under the Income and CorporationTaxes Act 1988, income from a trade, profession or vocation must be declared for income tax purposes: on the face of it, this includes all artists receiving income resulting from their activities as an artist. Leading judgments of the courts in relation to the taxing of prizes orgrants in recent years have amplified and clarified the basic statutory position.
Gifts or prizes given to or won by an artist are unlikely to be taxable. However, if the sum is in excess of £25,000 and is received by an artist who is an employee, such sums could be taxable under what are called the ‘golden handshake’ rules. It has been successfully argued before Special Commissioners that where a prize or gift has been received as part of remuneration for services rendered, then it will betaxable. Grants or subsidies which directly relate to an artist’s trade, profession or vocation will probably be taxable. This is where artists can fall into difficulties, because if a work is made specifically for a competition – say the John Moores – then any prize won would be taxable. Put another way, a past winner of the Whitbread Award was successful in appealing to the Special Commissioners that the prize should not be taxable – because the work was not made specifically for the competition. Likewise, for the same reasons, the Booker Prize has been accepted by the Inland Revenue as being tax free. It remains to be seen whether prizes won by artists who do not make awork specifically for a competition/award, but who enter themselves awork they had already made, would be liable to tax. There has been no case before Special Commissioners covering this point. And many artists have been required by Inspectors of Tax to pay income tax on such prizes. If in doubt, good practice requires that artists declare receipt of such prizes to their Inspectors, argue that they should not be taxed and, if they are assessed for tax payment, consider appealingto the General or Special Commissioners.
In 1979 the Arts Council of Great Britain and Inland Revenue reached an agreement and issued a memorandum dealing with the treatment of theCouncil’s award, and bursaries. The aim was to clarify for artists, arts administrators and Inspectors of Taxes what receipts should and should not be taxable. The memorandum has not been further updated and is therefore relevant today; and could equally apply to awards and bursaries from the Regional Arts Boards or other donors.
There are two categories:
Category A: taxable items
- Direct or indirect musical, design or choreographic commissions and direct or indirect commissions of sculpture and paintings for public sites
- The Royalty Supplement Guarantee Scheme
- The Contract Writers’ Scheme
- Jazz bursaries
- Translators’ grants
- Photographic awards and bursaries
- Film and video awards and bursaries
- Performance Art awards
- Arts Publishing grants
- Grants to assist with a specific project or projects (such as the writing of a book) or to meet specific professional expenses such as a contribution towards copying expenses made to a composer, or to an artist’s studio expenses
Category B: items exempt from tax
- Bursaries to trainee directors
- In-service bursaries for theatre directors
- Bursaries for associate directors
- Bursaries to people attending full-time courses in arts administration (the practical training course)
- In-service bursaries to theatre designers and bursaries to trainees on the theatre designers’ scheme
- In-service bursaries for administrators
- Bursaries for actors and actresses
- Bursaries for technicians and stage managers
- Bursaries made to students attending the City University arts administration courses
- Awards, known as the Buying Time Awards, made, not to assist with a specific project or professional expenses, but to maintain the recipient to enable him to take time off to develop his personal talents.
These at present include the following awards and bursaries known as the Theatre Writing Bursaries, Awards and Bursaries tocomposers. Awards and Bursaries to painters, sculptors and printmakers. Literature Awards and Bursaries.
It is open to make both a grant in Category AIO and an award inCategory BID to an individual and accordingly, in such a case, partonly of the sum received by the individual concerned will be treated as taxable. However, in relation to these cases, if the expenditure incurred by the individual in connection with the matters covered bythe AIO grant and the BIO award exceeds the amount of the AIO grant,the excess up to and including the amount of the BIO award will be regarded as covered by the BIO award, and to this extent will not be allowable as a deduction in arriving at his or her taxable profits. The remainder of any of the expenditure will be subject to the normal Schedule D expenses rules.
When such awards or bursaries are given, the recipient should be notified of the category into which it falls, for tax purposes.
Artists should also be aware that from 1997 the Inland Revenue willbe introducing a new self-assessment scheme for self-employed orfreelance people. Following successful pilot schemes, recently conducted in the Midlands, it has been widely publicised that self-assessment will indeed now occur. For those artists already filing tax returns under Schedule D, further information should now be available from their Inspector. For those artists not yet in dialogue with their local Inspector, they would be well advised to take steps to acquire further information, and to begin now to prepare for self-assessment. This will involve declaring all income and expenditureas an artist, subtracting one from the other and assessing the income payable on any profit resulting. It is vital that all receipts, bills, invoices, or other contractual documentation is kept by artists: to enable the accounts to be prepared accurately and easily; and to beable to prove to the Inspector, if asked, how and when the money was received and spent.
Artists with their own accountants should raise the matter at the earliest opportunity.
© Henry Lydiate 1995