10 MARCH 2020 http://www.writers-online.co.ukI
t’s said that the only certainties in life
are taxes and death, but there is a third:
paperwork. And that increases with
success in your writing career. We are
often asked whether it is sensible to set up a
limited company to manage your copyrights.
We have explored this complex topic in our
new Guide to the Pros and Cons of Forming
a Limited Company with the help of Barry
Kernon of accountants HW Fisher and
Maria Dawson, in-house lawyer with United
Agents. The guide is free for SoA members.
We concluded that while the tax
advantages of setting up a company can
be attractive to authors whose income has
reached a critical level, the complications
and cost of ensuring the correct paperwork
are considerable.Tax advantages
Authors often use limited companies for
efficient tax planning: you may pay less tax
if incorporated as a limited company than
by operating as a self-employed ‘sole trader’.
Whether that works for you and whether
the difference outweighs the fees you will
pay accountants and lawyers depends on
individual circumstances and can change
substantially year on year.
Companies currently pay corporation
tax at 19%, a more favourable rate than
even the basic rate tax band. But it is not
as simple as comparing the headline rates.
Corporation tax is only paid on a company’s
profits, and those can be managed to keep
them low by paying yourself a salary from
the company which counts as a business
expense to be subtracted from any company
profit. You can also charge any relevant
expenses to the company.
If your salary is kept below (currently)
£8,632, no national insurance liability
arises, and no income tax would be payable
either as this would be within your Personal
Allowance of £12,500. Your tax would be
based on the level of any dividend you
paid yourself from the company with
rates varying from 0% up to £2,000 to
38.1% above £150,000. This dividendtax is payable on top of corporation tax at
19%. That will currently result in a lower
overall tax liability if the income drawn is
kept below £50,000 a year. However, these
calculations are complicated by thresholds
for other items such as child benefit. There
is no easy answer that suits everyone;
age and the need for cash can make a
significant difference to the tax benefits of
using a company, so getting advice on the
best option for you is crucial.
A further way to reduce tax is to issue
shares to spouses, partners or adult
children to take advantage of their personal
allowances, and dividend allowance. But
bear in mind that you will be giving away
both income and value in your company.Limited liability
The normal reason for setting up a
company is limited liability, but this isn’t
of much use to authors who are unlikely
to run up significant creditors through
writing. It is not possible to limit your
liability in libel cases, and where a company
could in theory offer some protection (eg
in a claim of copyright infringement),
publishers generally insist that you give a
personal indemnity.Responsibilities
The main obligations of a company – and
there are significant penalties for non-
compliance – are that it must have its own
bank account into which all earnings are
paid; it must produce accounts in statutory
format to be submitted to HMRC and
Companies House (and a short version of
your accounts will be publicly available to
anyone who wants to look). Corporation
tax returns must be filed electronically once
a year. All of this involves accountants more
substantially than for self-employed tax
returns, so their fees are generally higher.Timing
Ideally you should form the company
before you start writing. If you start using
a company only after the work is alreadycomplete, it may be too late to assign
the existing copyrights in a tax efficient
manner. You can sell an existing copyright
to the company, but only at market value- which must be included in your self-
assessment return and on which you will
have to pay income tax.
The paperwork
But setting up a company is costly, so it
is only worthwhile once your work is a
commercial success. Copyright assignments
need to be in writing and properly worded,
especially if no money is changing hands. It
is advisable to involve lawyers.
If your copyrights are owned by your
company, any publishing contract must
be with the company, accompanied by an
Inducement Letter in which you personally
guarantee to write the book and indemnify
the publisher against costs and liabilities
if the company cannot meet them. Some
publishers have limited experience of
drafting such agreements and will in any
case be writing them to protect their own
interests, so you will need specialist advice
from a lawyer or the SoA.
If you transfer the copyright in existing
works to a company, any publishing
contracts for those works must be amended
via a ‘Novation Agreement’. UK publishers
will not always agree to executing Novation
Agreements or may not understand the
process, and publishers increasingly insist
on drafting bespoke Novation Agreements
and may charge you for the cost of their
expertise and time.
You can face the same problem in reverse
if it is no longer beneficial or economic to
run a company and you want to close it
down. Any such change creates legal as well
as accounting issues, including new Novation
Agreements transferring rights back from the
company to you, at which point publishers
can become exasperated and refuse to engage
with a new raft of paperwork.
So, this is not an easy decision, but it is
worth considering. Do read our guide and
seek specialist advice.SoA chief executive Nicola Solomon considers the pros and cons for writers
Forming a
limited company
Find out what the SoA could do for
you at http://www.societyofauthors.org
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