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The basics of book-keeping

1 May 2001 - EPUK

Book-keeping is a necessary evil that is never entered into by reasonable thinking human beings with any enthusiasm, writes EPUK member Martin Figura

Book-keeping is a necessary evil that is never entered into by reasonable thinking human beings with any enthusiasm.

These pages provide advice on the financial aspects of working as a self-employed photographer. A general overview is given and all advice given is on the assumption that you are operating as a sole trader. If your earnings are high then it may be worth considering becoming a limited company for the tax advantages, for which you will need more detailed professional advice. Another reason for taking the limited company option is if there a risk of being sued or being made bankrupt, as liability is limited to the company and does not extend to your personal assets. There are copyright implications when you run a limited company too, so beware and take proper advice.

This section will deal with the following:

  • Tax and the Inland Revenue.
  • National insurance Contributions.
  • Record Keeping.

EMPLOYED OR SELF EMPLOYED. It is important that you know whether or not you are actually self-employed as this affects the way you are taxed. There are a number of criteria for qualifying as self-employed, none of which are decisive on their own. They are:

  • If you work from home and/or use your own equipment.
  • You control and direct your own work.
  • Do you carry the risk of the business?.
  • Can you refuse work from clients?.
  • You have invested in the business.
  • You choose when the work is done.

It needs to be understood that even if you work for a number of clients, you are not necessarily self-employed in all cases. You can in fact have any number of employers.If you have a contract to work for a publication every Monday, then that may be regarded as employment. Other factors such as using your own equipment can counter this. Even if such an arrangement is for a brief period it can still be regarded as employment.

You may be employed and self-employed with the same client. If you use their equipment on a regular shift for which you are contracted then that can be regarded as employment, whereas additional ad hoc work, which you may or may not accept, could be regarded as self-employment. Persuading the client not to tax you at source for all the income may be an interesting exercise.

Many photographers also have other jobs, such as lecturing. All income is treated collectively for tax purposes, but proper accounts need to be kept for your self employed income.

BOOK-KEEPING

Organisation.

The main function of your book-keeping is to allow you to complete your Tax Return. It therefore seems to make sense to me to organise your records with that purpose in mind. i.e. Categorise your expenditure to fit the boxes of your tax return. Your accounts also need to be able to tell you who you owe money to and who owes you money.

Filing.

It is important that you can find your accounting vouchers and you therefore need a system that will permit that. I operate a very straightforward system that works. I have two files, one for expenses and one for income, both split into paid and unpaid. I simply file things in tax date (more of this later) order. This means that everything is filed in one way. I keep separate files for each tax year.

Accruals.

This is simply accounting for income and expenditure when it arises, rather than when it is paid. This is how your tax returns have to be based for the Inland Revenue. e.g. If you do a job for a client on the 29th March 2002, then your invoice must be tax dated on that day and included in your income for the tax year 2001/2002 regardless of when they pay. See bad debts later for if they don’t pay. The same applies to purchases.

Tax Year.

Tax years run from 6th April to 5 April. The Inland Revenue are prepared to accept accounts for 1 April to 31st March and this seems the easiest route.

Income.

There is no need to breakdown income into different categories for your tax return. However you may choose to split your income records to show different types of income, such as commission and reproduction fees. This can be useful in deciding which area of business to pursue, however for it to be meaningful you would need to split your expenses into the same categories which will complicate matters.

Expenditure.

In general you are allowed to claim deductions for business expenses. However, not all expenses are allowable and there are some that are that are not necessarily obvious. The help guide to the self employment page of your tax return provides a useful guide table and is reproduced below, adjusted for photographers..

SUMMARY OF ALLOWABLE AND NON-ALLOWABLE EXPENSES.

ITEM Tax Return Box Allowable Not Allowable (Any non business expenses)
Capital Expenditure 3.57 Capital expenditure is that which is for items that are regarded as assets. i.e. they have an ongoing value e.g. camera. See Appendix 1 for an example of an asset record and details of how to deal with assets. Claimed separately on tax form.
Cost of Sales 3.46 This is the direct costs of sales and should include film and processing costs.
Other Direct Costs 3.48 Discounts and commissions payable. Other costs that directly relating to jobs, such as assistant’s fees if not an employee.
Employee Costs 3.51 Salaries, wages, bonuses, pensions, benefits, employers NIC and other staff related costs. If you have a partner, you may consider paying them as an assistant, especially if they are not working. You can set a salary at a level to minimise tax and National Insurance. However, the Inland Revenue will expect it to be reasonable for the work done (sleeping with you doesn’t count) and that they actually do the work. Your own.
Premises Costs 3.52 Rent, business rates, water rates, light, heat, power, property insurance, security and other similar expenses. You can claim a proportion of costs if you use part of your home for business. See separate paragraph. You may also claim a small allowance for cleaning materials, I use to claim £20 per month, but the Inland Revenue ruled this as excessive, I know claim. I now claim £12.50 per month which is 10% of my cleaners bill, plus a little extra for materials
Repairs 3.53 General maintenance and repairs of business items.
General Admin 3.54 Stationery, telephone, fax costs, postage, mobiles, professional journals and subscriptions. Insurance not included elsewhere. If you have income protection insurance and you claim it as an expense, then you will be taxed on income from it. I do not claim for mine. Payments to political parties, clubs, charities or churches. Non-business phone calls. The Inland Revenue should be happy for you to estimate business use, so long as it is realistic. I use mercury and have a code for business calls, so it is worked out on the bill.
Motor Expenses 3.55 You can either claim for the business proportion of costs or a fixed mileage rate if your turnover is below the VAT threshold. See paragraph below for more details. Also claim parking or any hire or leasing charges. Non-business motoring. Travel between home and normal place of business.
Travel and subsistence 3.56 Non-motor travel expenses such as Taxis, Rail Fares and Air Fares. Hotel and meal costs, but see disallowable. Meal costs except reasonable costs on overnight business trips.
Advertising, promotion and entertainment. 3.57 Ordinary costs of advertising and promotion. Up to £10 per person per year for gifts that advertise your business. You cannot claim the cost of entertaining clients e.g. lunch for a picture editor.
Legal and Professional Costs 3.58 Accountants, lawyers and similar. Professional Indemnity insurance. Costs of settling tax disputes. Costs of buying assets. Costs and fines or penalties for breaking the law.
Bad debts 3.59 Debts that were not taxed when they arose, such as the sale of a capital asset. Amounts included in turnover that you do not expect to recover. If you do later recover amounts claimed for, it must be included in Box 3.50 in that later years tax return.
Interest 3.60 Interest on business loans and overdrafts. Repayment of loans or overdrafts.
Other Finance Charges 3.61 Bank and credit card charges. Hire purchase interest and lease payments. Repayment of loans or overdrafts. Depreciation and loss/(profit) on sale 3.62 See Capital Allowances. Generally depreciation and losses on assets are not allowable for tax and profits on assets are not taxable receipts. But you need to consider if you need to enter as a gain in the Capital Gains Pages.
Other Expenses 3.63 Any expenses not included above. Ordinary everyday clothes even if bought specially for business use. E.g. Photographer’s obligatory black leather jacket. Even though if you haven’t got one, you’re not a proper photographer.

Other Exclusions.

  • Gallery Openings
  • Meeting Clients – alarming but true. I had hotel expenses disallowed for London when I was down dragging my portfolio around, because I was promoting my trade. Meetings in relation to an already commissioned job are permissible I believe.
  • Working at home. Most photographers use their home as a base one way or another. You are able to claim a proportion of the costs shown in Box 3.52 if you do this. You need to calculate what proportion of your home that is used for business on a room bases, excluding bathrooms and corridors. I have eight rooms in my house, one of which I use as an office. It also houses the washing machine and freezer, so I only count 80% of it for business. Therefore I claim back 10% of those expenses calculated as follows.

Total Rooms 8

Room for business 1 (12.5%)
80% of Room (12.5% x 80%) = 10%.
If you have a room or part of the house exclusively for business then you may find yourself liable to business rates. You may also be liable to capital gains tax if you sell the property.

  • Motor Expenses. There are basically two options and you need to work out which is best for you:

Option 1. Claim a proportion of costs (insurance, tax, servicing/repairs, and fuel) in box 3.55 and also 25% Capital Allowances on the vehicle. You need to keep a mileage record to calculate the proportion if the vehicle is used for private use also. You may be able to agree a set proportion with the Inland Revenue.

Option 2. Claim a mileage rate based on the Fixed Profit Car Scheme, provided your turnover is below the VAT threshold (�54,000). You will need to keep a business mileage record.

First 4000 miles Thereafter
1500cc 40p 25p
1501cc-2000cc 45p 25p
over 2000cc 63p 36pFrom 6 Apr 02 it will be 40p per mile for the first 10,000 then 25p for all engine sizes

APPENDIX 1

  • ASSET RECORD. You do not claim for assets as a one off for your tax year, but by capital allowance of 25% per annum (40% in the first yr on plant and machinery including photographic equipment but not office furniture) over a number of years on a reducing balance basis (see below). All your assets can be pooled together, although it is best to keep IT equipment separate as you can now claim 100% capital allowance on it i.e. all in the year of purchase, but in BOX 3.57 of your tax return with other capital allowances. I believe that digital equipment has been accepted as IT expenditure. This example, for simplicity, deals only with the financial aspects. You may find it useful to have columns for serial numbers, guarantee details and so on.

It is important to note that the allowance is calculated on a reducing balance method, i.e. 25% of the pool balance at the end of the tax year, rather than the original cost.

Date

Item

Cost

15 Sep 01

Canon EOS1n with 28-80mm Lens

�1500

25 Oct 01

Billingham Bag

�175

3 Jan 02

Manfroto Tripod

�125

3 Feb 02

Elinchrom Lights

�1200

31 Mar 02

Written Down Value

�3000

Fin Yr 2001/2

Capital Allowances 40% (First Yr Allowance) Box 3.57 Tax Return

�1200

1 Apr 02

Balance Brought Fwd

�1800

15 May 02

Mamiya RB67 (a proper camera!) with 90mm

�1000

11 Nov 02

Mamiya 50mm Lens

�500

31 Mar 03

Balance

�3550

Fin Yr 2002/3

Capital Allowances 40% (First Yr Allowance) Box 3.57 Tax Return

�600

Fin Yr 2002/3

Capital Allowances 25% Box 3.57 Tax Return

�450

1 Apr 03

Balance Brought Fwd

�2500

And so on
  • Disposal of Assets.

When you dispose of an asset, then it is necessary to include any proceeds in your calculations. Capital assets are dealt with as a pool, so you do not look at the individual asset. The proceeds are simply deducted from the pool balance before calculating your capital allowances for that year.

Example:

Written Down Value BF 1 Apr 00 �1000
Additions During year ended 31 Mar 01 �250 (not plant & machinery) = �1250

Less disposal proceeds �450, = �800

Capital Allowances 00/01 25% �200

Written Down Value CF 31 Mar 01 �600

Pensions. Pensions, within limits, are a tax-deductible expense (but not on National Insurance) and you are advised to get one. You should seek independent financial advice on this. There is a special section on the tax return that is devilishly tricky. We now have stakeholder pensions so everyone can contribute up to �3600 pa regardless of earnings, payments are made net of tax relief. Contributions, that receive tax relief, are limited to the following:

Age at Start of Tax Year% of profit

Below 3617.5
4520
5025
5530
6035
61 or over40
There is a cap on relevant earning�s of �95,400

  • National Insurance.

You must pay National Insurance regardless of whether or not you play Class 1 contributions as an employee. You need to register with the Contributions Agency as soon as you start trading. You need to get Leaflet CWL1 “Starting your own business” from your local Tax Enquiry Centre or social Security Office. As a self employed person you will need to pay the following:

  • Class 2 Contributions.

This is a fixed weekly charge (currently �2).

There are exceptions if:

You have made Class 1 contributions in Tax Year then payment may be deferred.
If you have a small earnings exception if you anticipate earnings below �3955.

There are time limits on obtaining this exception and it is needed in advance.

  • Class 2 Contributions count towards:

Incapacity Benefit. Retirement Pension. Widow’s Benefit Maternity Allowance. It does not count towards Jobseeker’s Allowance.

  • Class 4 Contributions.

Class 4 Contributions are calculated on your net profit between �4535 and �29,900 at 7%. It is paid along with your income tax.

  • Self Assessment and Payment of Tax.

You also need to register with your local tax office as self employed and obtain a reference number. Some clients will ask for this and may deduct tax at source if you do not have one.

Self assessment tax forms must be submitted by the 31st January following the end of the tax year to avoid penalties. If you wish the Inland Revenue to calculate your tax then you will need to submit it by 30th September. If you have not been sent a form, then you should obtain one. They can be ordered from the Inland Revenue Website.

You will pay your income tax and Class 4 NIC in three stages:

31st January – 1st payment on account (based on half your profit for the previous tax year) for the current year. In your first year they will make a guess. If you think it is too high then can appeal to have it reduced.

31st July – 2nd payment on account for the tax year finished on the 31st March.

31st January following the end of the tax year. Any balance of tax due or owed back will be offset against the 1st payment on account for the current year.

Cashflow

It isn’t lack of profit, but cashflow that often kills businesses. It is vital that you are in control of your cashflow. You will be paying for film and processing ahead of receiving payment. It is important that you chase your debtors to make sure they pay on time.

If you become a bad payer, then you are likely to see your options closing in. If you can’t get suppliers to take your business, then you will not be able to operate.

It is vital that you anticipate when you are likely to have big outgoings. July 31st and January 31st tax payment dates are likely to be the key ones. Also your VAT payments if you are registered. None of these should come as a surprise to you. I calculate my tax liability at the end of every quarter and make sure that I have set aside sufficient resources.

It is very difficult, especially if money is tight, to stick to this edict. But it really is central to your survival and something you must be in control of.

Computerised Accounting Packages.

Using a computer programme for your book-keeping can make your life much easier if you know what you are doing. You will still need to keep proper records for the Inland Revenue and you should print out copies of your accounts. These records must be kept for 5 years and ten months from the end of the tax year. There are 2 main options:

  • Spreadsheet: A spreadsheet will allow you to record your expenditure into the categories required for your tax return. You can also use it to track creditors. You will have to set it up yourself and set up templates for invoices and other forms.
  • Special Software. There are a number of small business software packages on the market. They will track your bank accounts for you and you can set them to track your expenditure by categories. It will also produce your invoices for you and track your debtors (people who owe you money) and creditors (people you owe money to). It will also produce various reports. Some of the product available are:

Quickbooks.This is the programme that I use and it is fairly straight forward to use. It regularly comes out top in reviews in non financial magazines, a good sign for non accountants. Free trial copies are available from Quickbooks.

Sage. Make sure you ask for the small business one. 08000 928091 for trial CD.

(C) Martin Figura, 2001

Other sources of advice and links

The following other sources of advice are recommended:

Artists Handbooks – Money Matters ISBN 0 907730 29 9 (Strongly Recommended)
Artists Handbooks – Selling ISBN 0 907730 19 1
Artists Handbooks – Fundraising ISBN 0 907730 20 5

The Artist Handbooks are published by AN Publications, Artic Producers Publishing Co Ltd, PO Box 23, Sunderland SR4 6DG 0191 567 3589

Tax Guides. There is a plethora of these on the market published by the various finance publishers. Many of them deal with discreet areas only, but there are some general guides available, which are the best for the non-accountant and give advice on information across all areas. They are annual publications and tend to cost about £30-40. I don’t buy one every year, the rate changes are easily available from other sources. They may be considered slightly expensive for most, but do give you all the information you need in one book. I have tried two:

Allied Dunbar Tax Handbook 2000/2001 ISBN 0-273-65043-2. I found this guide very difficult to use. I had real trouble finding what I need from the index and it seems to lack a table of rates appendix. I suspect this is for the enthusiast only and is a poor substitute for a regular sex life.

Tolley’s Tax Guide 98-99 (my 01-02 copy is on order) ISBN 1-860-12831-9. This is an excellent general guide that provides easy accessible information on all matters. It has a strong narrative drive that twists at every turn and keeps you guessing and hooked right through to the dazzling ending. (I made the last bit up).

Bank Guides and Self Employment Guides. Most banks publish these and plenty are available in the general market. They also include other advice on being self-employed. The banks will give these away free, but be careful how you take advantage of this. They may try and persuade you to open a business account with the accompanying charges. Obviously they are not updated as regularly as the tax guides, so are a less useful guide to rates etc.

Inland Revenue. The Inland Revenue website gives details on all aspects of taxation and is fairly accessible. It also allows you to order leaflets on particular subjects. You can also obtain details of their regular advice days that are well worth attending. The Inland Revenue is much more helpful than it was, however it is under pressure and advice can be contradictory at times. If you have a query on a particular point it is best to get the advice in writing. The guide to the Self-Assessment Self-employed Return also has a table that details what is allowable and disallowable against earnings which is very useful.

Disclaimer All the advice is given in good faith, but is given as a guide only. Individuals should seek the necessary advice for their own circumstances as required. No liability is accepted for any losses incurred due to the advice given in this guide. Tax is a complex subject and for the sake of brevity this advice only deals with subjects superficially.

I’m afraid I cannot get involved with providing individual advice, but will try and respond to EPUK postings when I can help. (Rates given are for 2001/2 unless otherwise stated.)

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