4th March 2020Authors and Their Loan Out Companies

Many authors channel their income through limited companies but they have to be operated correctly and it is usually best to seek professional advice. Sometimes the author will be better off not using a limited company.

The main advantages are:

1. The ability to shelter income from the ravages of higher rates of tax. Corporation tax is currently at 19%. As long as the author’s personal income does not exceed £50000 per annum, any dividends will be taxed at 7.5%, the first £2000 being taxed at 0%. Above this level dividends are taxed at 32.5% and 38.1% which can mean the overall tax bill is more than it would be without a company.
2. Large advances can be kept within the company and drawn out over a number of years.
3. The company can build up a portfolio of assets because of this cash flow advantage.
4. The ability to issue shares to a partner. Profits can be shared, and tax levels can be lowered.

The main disadvantages are that there is additional administration, higher accountancy fees and there are more rules to be complied with.

For a company to be able to receive royalties and advances, it must be entitled to do so.  Authors cannot sign contracts in their own name and simply put earnings into the company.  HM Revenue and Customs regard this as “nicknaming” the income as belonging to the company.  The earnings remain taxable in the hands of the author.

If an author writes a book and then assigns the copyright into a company, this constitutes a disposal of intellectual property and the author has to pay income tax on the open market value.  This liability arises on any assignment, licensing or sale of the copyright once this has been created.  This market value may have to be negotiated with HMRC and has to be self-assessed.  In this scenario the author has to pay income tax on a substantial proportion of the book advances receivable, the company pays corporation tax on similar figures and the author has to pay income tax or dividend tax on amounts withdrawn from the company.  A very expensive scenario.

Copyright assignments must be done in writing.  Where there is a nil consideration, a Deed must be prepared.

Where there is a multiple book contract and the copyright is assigned, it is likely that any income tax liability will only apply to book one, as usually this is the only one to have been completed at that stage.

Where a book deal is entered into and the level of advances has been agreed, or is later agreed, the figures involved have to be used as a basis for the open market valuation.  Allowances can be made if there are likely to be costs incurred before publication.

Faced with possible income tax liabilities on the assignment, it is often better to sell the copyright to the company at this market value, as this will enable it to obtain corporation tax relief on the purchase price.  This is done by amortising the cost over time.

The ideal scenario is for the author to form a company first, then write the book on behalf of the company.  There is then no assignment needed, just some simple paperwork.  It follows that, once an author has a company in place, all future book earnings can be channelled through it.

Self-employed authors are able to claim “authors’ averaging” which helps to reduce tax liabilities where earnings fluctuate from one year to another.  This can frequently reduce tax liabilities to a level similar to that achievable by the use of limited companies, without the complications.

Read our tax guide for authors and freelance journalists here.