HS234 Average for creators of literary or artistic works (2016)
Authors and artists with fluctuating profits may pay large tax one year and little or no tax another year. To help reduce your tax bill, you may be able to average your profits over 2 consecutive years.
You can use the average if:
- you are self-employed or in partnership and the business started before April 6, 2014 and did not end during the 2015 to 2016 tax year
- your profits come entirely or mainly from literary, dramatic, musical or artistic works or from drawings
- you or your business partner (if you are in a partnership) created the works personally.
Literary works include works protected by copyright. Artistic works include paintings and sculptures but do not include works of craftsmanship, such as furniture making.
You cannot use the average if you are using cash accounting to calculate your profit.
The average will be of no use if you pay taxes at the same rate for 2 consecutive years. But, it can help, for example, if you:
- pay tax at the base rate 1 year and at the higher rate the following year
- have to pay taxes 1 year but your income decreases so you do not pay them the following year
Who can claim the averaging
You can ask for an average if your profits come from the transfer of works or from the royalties you collect for allowing people to reproduce your works. So, for example, you can ask if you are:
- an author whose income comes from the sale of your written work – even if a small portion of your income comes from personal appearances
- a computer software author whose income is derived from royalties for the reproduction of code you write, which is protected by copyright
Who can’t pretend to be the average
You cannot ask for an average if your profits come from the services you provide. So, for example, you cannot claim if you are:
- an architect whose income comes primarily from your services – even if a portion of your income comes from the sale of copyrighted material
- a computer programmer whose income is derived from the script or program writing service, and not from the work itself
How to average
Check that your profit for the poorest year, minus the adjusted amounts, is less than 75% of the figure for your best year. If so, you can use the average.
If you claimed the average for the previous tax year, use the amount in the average adjustment box on your 2014 to 2015 tax return.
Then check if the difference between your profits for the 2 years is more than 30% of your profits for the best year. If so, calculate the average by adding up the profits for the 2 years and divide the total by 2.
To find the average adjustment, calculate the difference between your profit for the year and the average profit. If your profits for 2015 to 2016 are the highest profits, you deduct the adjustment from the average. If it is the lower profits, you add the adjustment. The examples below show you how to do this.
Terry’s benefits are:
|2015 to 2016||£ 10,000|
|2014 to 2015||£ 40,000|
|Total for 2 years||£ 50,000|
Terry claims an average so that his total tax for the 2 years is adjusted to what it would have been if his profits had been £ 50,000 ÷ 2 = £ 25,000 each year.
Terry puts the adjustment on his (full) Freelance pages for 2015 to 2016, to show:
|Company net profit||£ 10,000|
|plus Average adjustment||+ £ 15,000|
|Adjusted profit||£ 25,000|
If the difference between your profits for the 2 years is between 25% and 30% of the profit for the best year, you calculate it differently. To calculate the average adjustment, multiply the difference by 3 and subtract 75% of the profit for the highest year.
Nahid is a partner in a partnership. Its share of the profits is:
|2015 to 2016||£ 50,000|
|2014 to 2015||£ 36,000|
The difference is £ 14,000. This represents between 25% (£ 12,500) and 30% (£ 15,000) of the highest profit. The adjustment is therefore:
|£ 14,000 x 3||£ 42,000|
|£ 50,000 x 75%||– £ 37,500|
Nahid puts the adjustment on his (full) partnership pages for 2015-2016 to show:
|Share of partnership profits||£ 50,000|
|minus Average adjustment||– £ 4,500 (with a minus sign)|
|Adjusted profit||£ 45,500|
How to claim
You must make your request on your 2015 to 2016 income tax return and indicate the tax adjustment due for the previous year on your Tax Calculation Summary. If your profits for 2014 to 2015 are the lower profits, you put the adjustment as a tax increase. If these are the highest profits, you express it as a tax cut.
You do not need to change your tax return for the years 2014 to 2015. We will change the amount of tax and Class 4 national insurance contributions you have to pay for the years 2015 to 2016 in order to keep account of your adjusted profits.