The Tax Man Cometh

Reading last month’s Page Two (Art Monthly No.74) contribution by Jennifer Oille, reporting the apparently unfair and inequitable treatment of artists under Canadian tax laws, stimulated some comparison with our own regime; sharing these thoughts might prove interesting and informative.

The small manufacturer: Toni Onley
His problem seems to be this. If classified for tax purposes as a ‘small manufacturer’, he has to show a profit within approximately four years in order to claim expenses against income; income is qualified not simply on a cash basis, but also includes the market value of any works unsold or undestroyed during the tax year in question against which actual expenses are not allowed (because the work has not actually been sold). Thus, his $1 million worth (assessed market value) of unsold prints are brought to tax as ‘accrued income’, against which he cannot set-off the actual expenses of making these works. His only solution, under the tax regime, appears to be to destroy the $1 million worth of prints before the end of the tax year so that they cannot be assessed as ‘accrued income’, and then he can claim a tax credit for their production costs.

In this country, this issue need not arise. There is no tax classification of ‘small manufacturer’ as such, but rather a legal category for taxing the profits of a ‘trade, profession or vocation’, thus embracing the small manufacturer, trader, self-employed doctor, lawyer, musician, visual artist and so on. What is more, although such free-lancers here are expected to show a profit over a similar period (3/4 years), if they in fact make a loss they may nevertheless be allowed to claim actual expenses against actual income during those years of trying to make a profit. As a result, visual artists here who expend more in their production of works (especially during their first ten years or so, if not forever) than they receive in sales, can be allowed to set-off the one (actual expenses) against the other (actual income) and reduce their taxable profits accordingly.

Compared with their Canadian colleagues, visual artists here negotiating with the Inland Revenue on a cash basis for income tax purposes have no reason even to consider creating inventories of unsold work for ‘January Sales’ and/or their destruction before the end of the tax year. Moreover, British-based practitioners working with a view to profit, yet who do make ‘trading’ losses in any one year, are also allowed to roll over such losses to future tax years so as to reduce their taxable profits in those later years; and that is not all. Such trading losses may be set-off against other forms of earned income so as to reduce their tax bill on those other earnings e.g. the artist has (in addition to free-lance practice) a full/part-time job of work producing income, against which can be set-off free-lance trading losses, thereby reducing the amount of tax payable on the income from that job of work. Both these measures, roll-over and set-off reliefs, provide most welcome support for the professional practitioner in this country, without which most would probably be in dire straits (as indeed would most other self-employed people in Britain).

Returning to Onley’s problem, his double bind is that if he is not classified as a ‘small
manufacturer’, he is likely to be classified as a ‘hobbyist’, just like the unnamed video artist in the piece.

The hobbyist: A.N. Other Video Artist
Artists showing no reasonable chance of making a profit are threatened by reclassification as ‘hobbyists’, probably meaning, in Canada, that if they were then to destroy their unsold artworks, this curious act of vandalism would not produce the tax credit available to ‘small manufacturers’, nor would they be able to set-off production expenses against other forms of free-lance income e.g. from bits of teaching. This state of affairs is most unsatisfactory for Canadian visual art in general, because Canadian artists wishing to produce artworks for exposition only (n.f.s./installations etc.) or for sale at a price less than production costs, always risk the official classification as hobbyists for income tax purposes. Put another way, those artists alone (and not the State through tax reliefs) must absorb the expenses of producing non-saleable artworks – the very stuff of innovation and experimentation.

Rather than impeding such development, our tax regime fosters it. Although we may likewise classify as ‘hobbyists’ artists who do not appear to be working with a view to profit, the consequences are not so draconian. Such artists here may still be allowed to set-off production expenses against income from sales, thereby reducing their taxable profits, though more usually producing losses; but such trading losses may not then be used for the roll-over or set-off reliefs described above. This does make for a fair and just situation in Britain as a whole, where loss-making hobbyists abound (not just in the visual arts and crafts); such people cannot subsidise their hobbies out of tax currently paid on profits of a single year (i.e. they cannot roll-over trading losses of previous years), nor out of tax currently paid on income from other sources (i.e. they cannot set-off trading losses in the same year). (Remembering that professional practitioners can be allowed to roll-over and set-off, as discussed above.)

Full-time artist/part-time lecturer vs, Full-time lecturer/part-time artist
This problem is common to Canadian and British tax regimes, and is essentially one of definition and criteria. Full-time free-lance artists who, as part of their professional practices, receive fees for delivering lectures/seminars and so on in art schools, are more often than not taxed at source by the colleges (under the influence of the Inland Revenue) as if they were full-time staff members; they are then left to fight what is often a losing battle with the Inland Revenue which may well regard their full-time production of artworks as a ‘hobby’ and their income from such teaching as their ‘real job of work’ taxable without deduction of production and all other professional expenses. On the other hand, there are artists who started doing the odd day, then arriving at a point where teaching became their ‘real job of work’ (i.e. the Sunday painter earning $40,000 a year from an art school teaching post), yet who still insist that they are full-time practitioners. Understandably, this gives the Inland Revenue cause for suspicion and concern and, unfortunately, can and does result in other genuine full-time practitioners being treated with circumspection or disbelief, precedented by the abuses of a minority. Experiences of professionals in the field tend to show that a straightforward dialogue with the Inland Revenue in this country, especially through accountants specialising in the arts and known to the Inspectors, can and does produce the proper recognition and tax status the full-time practitioner truly deserves.

In both countries, the need is, perhaps, for guidelines, drawn up through consultation with arts’/artists’ bodies and arts accountants, establishing criteria for determining full-time practitioners and distinguishing them from hobbyists and employees, published and available for use by arts community, its accountants and the Inland Revenue.

The grant/award/bursary: taxable as income?
This is another problem shared by both countries. Some progress has been made in this country in respect of such payments. Developed by ACGB, now taken on board by the RAA’s, guidelines have been drawn up with the Revenue, whereby such payments are to be identified as being not normally taxable when given for the purposes of ‘buying time’ to carry out work; and as being normally taxable when given for project costs, materials and so on. Artists are usually advised at the time of payment whether the donor regards the payment as being normally taxable or not. It appears that these arrangements are not legally binding, but do provide helpful guidelines for the three sides involved: the Revenue, the grant-giving body and the artist. If there is a better solution, perhaps it might be produced in Canada.

Some further thoughts
The Canadian situation (as presented in Oille’s piece) does indeed speak of taxation by analogy (with the Canadian ‘small manufacturer’), and of unfair and inequitable treatment of artists. It will be valuable and interesting for us to see whether the Canadian Government can be persuaded to recognise artists as an ‘independent cultural sector with unique circumstances’ – a most unattractive argument for governments which usually try to create tax regimes which affect everyone equally and without also creating too many categories of exemption or exception. In this connection, and particularly when pondering the prospect of Onley’s bonfire of unsold prints, one suggestion might be to create a scheme (not a regime) for such artists, namely: unsold works have to be offered for sale to the State, which could then buy them from the artist at the market value (agreed by the artist with the Revenue) – in lieu of tax; the remainder of works would be kept by the artist and taxed (as now) as ‘accrued, income’. Not by any means an ideal suggestion, but it would mean that the State would be encouraged to build a collection of contemporary artworks – and/or to have a better understanding of the problem of the ‘small manufacturer’ classification for artists; and for artists it would mean that the production costs of work sold to the State in lieu of tax could be set-off to reduce the tax bill, that the remainder of the unsold works could be sold tax free at a later date, that the double bond would have been broken in respect of works sold to the State and, perhaps most important of all, the artworks would still exist.

A further or alternative suggestion might be to allow all small manufacturers (including artists) to be assessed for tax on a cash, rather than an accrual, basis as we do in Britain.

The British situation, by comparison, appears to be much more fair and equitable, despite its own problems. Artists here have no special status or recognition, do not appear to need or want one and in any event are unlikely to be able to justify having one. An improvement which is achievable and desirable would be the introduction of sensible guidelines (discussed above) enabling Tax Inspectors readily and easily to identify and distinguish practitioners, hobbyists and employees in the visual arts.

In the absence of any such guidelines for all to use, there is much ignorance, misunderstanding, mythology and fear throughout the arts community about income tax, and this in turn fosters and promotes widespread evasion or non-disclosure. Whether it is a question of identity in this country or the destruction of artworks in Canada, the issue is the same: the integrity and status of visual artists within society.

© Henry Lydiate 1984

Since the recent demise of the advice and assistance service offered by Artlaw Services, the Editors have been forwarding letters of enquiry to Henry Lydiate; they are willing to continue to do so, and whilst he cannot guarantee an immediate response, Henry Lydiate will reply to all who write in.



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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.