Many creatives have corporate entities through which they conduct the business of selling or licensing their intellectual property (IP). Whilst there are a myriad of benefits to setting up a limited company, they may not always be necessary and beneficial. Here we take a look at some of the tax implications of trading via a limited company to help you make the right decision.

  • Does the company have the right to receive royalties and advances? The company must be the signatory to any agreement. If you sign a contract in your own name and put the money into the company, HMRC will consider the income to be yours not that of the business and so it will be taxed in your hands.

  • Where did the IP originate? If you create something and then transfer it to your company, you are disposing of your rights. As you are connected to your company through ownership, this disposal will subject to income tax based on the open market value of the rights. Where a deal has been entered into and/or the level of advances have been agreed, these figures may be used as the basis for the open market valuation. Valuation of rights is far from straightforward and may be open to challenge from HMRC.

  • How much tax will I have to pay? You may end up paying tax multiple times on the same income if you have to i) pay income tax upon transferring the rights into the company, ii) pay corporation tax on the income generated through the sale or licence of the rights and ii) income tax on any dividend.

  • What happens to my averaging claim? Because of the fluctuating nature of income from creative works, authors and artists can make averaging claim that allows you to add together two consecutive years’ profits and average them for tax purposes. The claim is not available to those who trade through a limited company.

  • What about VAT? Royalties are normally subject to VAT, subject to the place of supply. You can register for VAT at any time but once the turnover of the business exceeds £85,000 in an given year registration is compulsory.

  • What about overseas projects? If you have been working with an overseas client or your work has been used in another country, you might be subject to withholding tax on royalty payments. Companies in specific territories may need to deduct withholding tax (usually 20%) from your payments. If the UK has a double tax treaty with that country, treaty relief may reduce the liability.

  • Where can I work? If you find that you are more inspired to create when outside of the UK, be mindful of the corporate tax consequences of doing so. If your company is incorporated in the UK but its central management and control take place elsewhere, then the company could be deemed dual resident and you may need to rely on the tax treaties to determine where the worldwide income should be taxed. Furthermore, under the permanent establishment rules, if you create a fixed place of business abroad, or enter into contracts there, then you may have to pay tax on the income generated from your presence in that jurisdiction.