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Do the words “Inland Revenue” make you nervous? Have you ever signed for gig money as “Donald Duck”? Are your returns never happy ones? If the answer to these questions is “yes”, Steve Cobham has a rough guide to tax and the gigging musician that just might help you sleep better at night!

When you were paid at your last gig, and stuffed that thin wad of beer-sodden notes in your pocket, did you spare a thought for the taxman? If you did, and I suspect a good few people reading this didn't, then are you paying him too much? Over the course of this article, you'll find tips to keep you smiling confidently under his basilisk-like stare and, more to the point, save money on your tax bill.

Let's face it, no-one likes paying tax, really, although, to paraphrase the late President Roosevelt, it's the price we pay for an organized society with schools, hospitals and roads, as well as other essentials like motorway cones. Even if you don't even want to contemplate the very existence of the Inland Revenue, this is one entity that certainly isn't into self-delusion. It wants what's due to it and, what's more, it knows where you live!

The Accountant's Tale

There is a way through this tax maze, and there is someone who will help you find it - an accountant. Contrary to popular opinion, accountants don't work from dingy offices above the local video shop and see their life's work as screwing every last penny out of you whilst defrauding the taxman. (Try telling that to Sting!) Seriously, if they were all like that, they'd soon lose their clients, as well as their personal liberty.

Just as you should when buying any product or service, shop around. You get what you pay for, so don't be tempted to always go for the lowest fees. I spoke to six accountants, all on personal recommendation, before I settled on one, but why bother in the first place?

I spoke to my own accountant about the advantages of seeking professional tax guidance.

After he had held me upside down and sorted out the small change from amongst the plectrums spilling out of my pockets, he proceeded to offer a few words of free advice, which I'll share with you now.

What he told me applies equally well to all self-employed people, as well as musicians, but, as he pointed out, certain sorts of, shall we say, “artistes” are not noted for their organisational skills. (Now, where did I put that PA rig?)

In brief, he suggested that an accountant can offer you help in setting up clear and precise accounts which will help you monitor your tax situation more easily. He can then produce your final end of year balance in a form that you can understand, and your tax office will accept. He will also need to spend less time on producing this and thus charge you less. You will also be given detailed help in claiming all your entitlements with regard to expenditure. For instance, as I use part of my house as an office and another part as a guitar tuition studio, he was able to arrive at a figure that accurately reflected the proportion of heating and lighting bills that I could claim against tax.

Self-employed people have limited social security entitlements, but your accountant can advise you of your welfare rights if you have a “slack” period in between that sell-out concert tour and a season in Las Vegas.

You also have help from someone who has experience of dealing with the tax man. In fact, as far as I am concerned, unless I ever have to see an inspector about any irregularities (my knees are knocking at the thought of it!) I can leave all contact with the tax office, including forms and correspondence, to my accountant. When I went to discuss my first end of year return with him, he brought out a huge folder stuffed with correspondence to me from the tax office that I'd never seen come through my letterbox. In fact, I have only ever received an initial declaration of self employment form, apart from tax returns, from the Inland Revenue in total. Once I said that my accountant was dealing with my tax affairs, all correspondence went to him. It gives me more time for music, and that's a lot more fun than tax!

As for cost, you can pay from about £100 upwards for an accountant. I wouldn't like to say how much you ought to pay. It depends on so many different things; your capacity to pay, the services you are offered and how much business you do. I didn't go for the most expensive accountant I could find, but neither did I have to compromise on the services I wanted. The best advice I can offer is to find an accountant who suits your needs, and with whom you get along.

Having agreed a flat fee with him, I pay mine by monthly standing order so that I do not have a large annual accountancy bill. This may be another factor to take into consideration when searching for the right person to manage your tax affairs.

Oh, yes! Don't forget, you can claim your accountant's fees against tax as they are a legitimate business expense. You're saving money again!

(Many thanks to Tony Byrne at “Byrne Williams” in Milton Keynes for his time and help with this section)

“Joe's” Tale

As an example of how your tax affairs can become a nightmare, let me tell you a true story. Only the names have been changed to protect the “innocent”.

A friend of mine, let's call him “Joe”, was in a club band called “Omnibus” that gigged regularly a couple of times a week for about four years. The band broke up one Christmas, and the following April he received a tax return which he dutifully completed and sent back. Some weeks later, he received a “summons” to meet with an inspector at his local tax office. There, he was then questioned as to the accuracy of his return and asked if he had declared all of his and his wife's income. “Joe” said that he had filled in the return accurately and declared all sources of income. He was then asked the same questions again, to which “Joe” made the same replies. The inspector then said, “If I said the name “Omnibus”, would that mean anything to you?” Instant collapse of muso into a gibbering, quivering, dribbling heap!

In fact, the inspector only knew the name of the band as “Joe's” wife had signed on behalf of the band for money after a gig and he had not declared this amount on his tax return. The interview then continued for a further hour, during which the inspector extracted information very easily, due to “Joe's” confused mental state. He was told by the inspector that he had to produce all records of gigs and amounts paid, and also the names of the other band members, which he refused to do. It was then stated that he might be liable for the rest of the band's tax if their names weren't divulged. Finally, he was told to go away and work out what he'd earned and not declared. If he didn't arrive at a figure, he would be billed for a tax office calculated figure and a fine of the equivalent amount if he didn't pay this. The irony of the whole affair was that this inspector had played in bands himself and had picked up the discrepancy that caused the investigation in the first place by sheer chance! Oh how “Joe” laughed at this quirk of fate as he drove home!

He then contacted the other band members, “Matt” and “Simon”, to tell them of the catastrophe. The trio sat down and discussed the problem and “Matt” and “Simon” agreed to make themselves known to “Joe's” investigating officer. They then worked out the amount they had earned, a fairly easy job as “Simon” had fortuitously kept some record of the gigs. In the end, “Joe” and “Matt” had to pay the sum of £800 each to the Inland Revenue. “Simon” was lucky. His tax was dealt with by a different office and a decision was taken not to collect the outstanding amount.

This is one of the strange things about our beloved tax system, There is a set of rules and regulations that governs the payment of tax, but each tax office has some degree of autonomy as to how they collect it. When “Joe” told me this tragic story, he admitted to inwardly shuddering as he spoke, even though it all happened 10 years ago!

Nowadays, all his income is declared and, after his traumatic rehabilitation, he is a reformed character, able to hold his head up high again in polite society.

The Small Print

Before we start to explore the twisted avenues and dark alley ways of the gigging musician and income tax, there is one thing that needs to be made clear above all else. This is a very rough guide to the subject and must not be taken as definitive in any way. Everyone's tax situation is different and you must find out details that apply to your individual circumstances for yourself. Only then will your rights and entitlements, as well as your legal obligations, be fully clear. I don't want to be held responsible for problems with your tax bill, I'm too busy trying to avoid them with my own, thank you!

Merry Christmas Everybody!

Turn to the events listings in your local paper, and you'll probably find a couple of dozen adverts for gigs. Perhaps your name is amongst them. If it is, then the bottom line is this. If you make money making music, you are legally obliged to pay tax on it.

No, don't panic! Oh dear, too late! Pass the smelling salts, please!

Do you feel better after that lie down in a darkened room? Now for the good news. There is some, trust me. How much tax you pay will depend upon a number of factors such as how much you earn, whether you are self-employed and what provisions you make for the calculation of your own tax, but, with thought and planning, you may end up paying less than you think whilst still staying on the taxman's Christmas card list! Yes, he too celebrates the festive season along with the rest of us. I once worked for a couple of months in my local tax office during college vacations and I can vouch that they are as human as you or I! If you're fair with them, they're fair with you.

Tax Status Quo

The first aspect to consider is your tax status. It is unusual for a gigging musician to be waged, with their employer paying their tax by deduction at source, as well as National Insurance and company pension contributions. Such tax payments fall under the PAYE (Pay As You Earn) scheme, with which you may be familiar if you are an employee. However, what if your work lies partly or solely within the broad spectrum of the music business? How do you pay tax, and what could going self-employed offer you?

Hey Mickey!

If you want to bathe in the glow of self-righteousness that is the due of every upright tax-paying “road rat”, then your first step is to contact your local tax office or the office to which you submit your tax return if you have other employment. You'll find the local office number in the phone directory under “Inland Revenue”. If you already pay tax, the initial office to contact will be shown on any correspondence you may have had from them. The next job is to ring them and say what your particular line of work is going to be. As most of your gig income will be cash in hand, perhaps with a receipt to be signed - how many of you reading this are called Mickey Mouse, I wonder? - and no deductions are made by your temporary “employers” for tax, then you are, by default, self-employed. So what exactly is self-employment?

Pinstripes and Leather?

The Inland Revenue's definition is perhaps the best one to use. “Self-employed people are those who work for themselves, and are not working for an employer”. Simple really. It is also important to note that you can be both employed as, say, a bank clerk, and self-employed when you doff your pinstriped suit and don leather and studs in order to hit the road as a member of “Goresplash”.

Taking Care Of Business

When I first decided to become self-employed, I discovered a fantastic, often free resource that helped me immensely. Most major towns and cities have an organization called “Business Link”. This national, government-sponsored body aims to improve the efficiency and competitiveness of industry and commerce by offering advice and support to any type of business. They run training courses for those people contemplating setting up in business and these include modules on keeping accounts and other tax-relevant matters that I found extremely useful. If you are already waged, you may have to pay for these courses. If you're interested, you'll find the phone number under “Business Link”, strangely enough.

Three Steps To Heaven

If you decide to become self-employed, you then have three main legal obligations:

  • To keep adequate and accurate records including income and expenditure.
  • To submit a tax return based on the truthful details contained within your records.
  • To pay any tax due by the date as stipulated by the Inland Revenue.

”Gold” Records

As a self-employed musician, you need to keep a record of the dates, locations and fees for every gig you play. Any business assets, such as your instruments, PA and transport are also listed. Remember I said that there was money to be saved? Well, your accounts also need to show your expenses. These include things like guitar strings, drumsticks, keyboard stands, microphones, petrol, amd even that new PA you bought for those bigger halls you're now playing. Anything, in fact, that you legitimately use in your business. You then get these expenses offset against tax. To illustrate this, if you earned, say, £10000 for the year, and your expenses were £4000, then you would only pay tax on the balance of £6000. The more you spend, the less tax you pay! Receipts are required though, and should be appended to your accounts. The “Arthur Daley”-style plastic carrier bag full of crumpled, illegible receipts is not the best way of organizing them. An envelope for each month with all receipts numbered and their details entered into my accounts book is my way of doing things and it works too. Don't forget to keep a record of the assets you are bringing into your musical business, that is, all the gear you use. This can be offset against tax as you can claim for depreciation of equipment.

Loss Lobos

If your expenses exceed your income, you will be running at a loss, and may be entitled to get this offset against any other tax you may be paying, from your day job, for instance. However, the Inland Revenue may then query whether you are in business at all, especially if you make a loss year after year. This would then be viewed as more of a hobby and you might find that you would not receive any reduction in tax offset by expenses. As with all tax matters, you would have to discuss these circumstances with the tax officer who is in charge of your case.

How To Avoid Constipation

This current tax year, which runs from April 1997, sees the introduction of “self assessment”. This is an attempt to make the collection of tax more efficient and straight forward. In effect, the taxpayer has to estimate his own tax liability.

Now, this may seem, on the surface, to be rather like giving a bank robber the keys to the vault, but I'm sure that deep down you've realized that there must be a catch. You're right, too! Don't ever be tempted to cook the books. Tax officers are wise to every fiddle that's around, and although they do not investigate every claim, if they see something fishy they'll be on to you faster than you can say “brown trousers”, and that is a very apt phrase as you will discover elsewhere in this article when you read “Joe's Story”. In previous years the Inland Revenue needed to have “just cause” to investigate, Now, because you are estimating your own tax, they have more time to track down miscreants and also set up random investigations. They then have the right to examine any of your personal and financial details and “ask” you into the tax office for questioning. This can be a very “laxative” experience!

Return To Sender

When you have received your tax return you are then required to submit it by a certain date, currently 31st Jan 1998. Failure to do so automatically incurs a £100 fine. If you prefer to let the tax office assess your tax, which is still an option, this date is then 30th September this year, but with no threat of a fine. Either way, you have, from the date of receipt of the form, the previous April, at least four months to submit your return. Not exactly a rush, is it?

Bank Bank

It goes without saying that it is in your interests to keep your financial documents well-organized. To help you with this, you might consider opening a business account at a bank. This will enable you to keep your business finances separate from your personal finances. I find that this helps me to monitor the key areas of income and expense and also, as a bonus, make business decisions rather more easily. As far as the Inland Revenue is concerned, as a self-employed person, you and the business are one and the same and so your current account may come under scrutiny. So, no putting that cheque from that gig in your personal account and hoping you'll avoid tax. They've seen it all before! Whereas, if you have a business account, this makes things more cut and dried and helps to demonstrate that you are not attempting to hide any business income. As an incentive, the high street banks offer free business banking for the first year or so of trading. From then on, each withdrawal and deposit costs a flat fee.

Reeling In The Years

When you have submitted your tax return and the Inland Revenue has approved it, you then have to pay the tax due. This is where the system starts to get complicated and if you are considering becoming self-employed you need to contact the tax office and request the relevant pamphlets to help you understand it. These are free, and, I have to admit, written without much use of officialese. Using myself as an example, I have just submitted a tax return for the tax year 1996-1997 and I will pay the tax owing on this by the end of Jan 1998. I will also have to pay some tax on account for the tax year 1997 - 1998 based on the 1996-1997 figures. If you're confused, get hold of the Inland Revenue's literature for a more detailed explanation or ring the office. They want to help you as well as ensure you cough up the readies.

Never Enough

It may be obvious to some of you, but there's a possible area for disaster here that I ought to explain for everyone's benefit. If I'm not paying tax as I earn it, I have to ensure that I stash away sufficient dosh to meet my tax bill when it comes crashing onto my front doormat somemetime before the end of next January. If I don't, and I can't pay, I will be liable for a cash penalty. What's more, if I pay too little on account for next tax year's bill, then I will be charged interest on the deficit. Now, that's scary, as you have to anticipate what you are going to earn. In the world of gigging, there is nothing certain, as you well know, so when you estimate what you're going to earn, it may be wise to slightly overestimate the figure, and thus keep your tail covered, in the event of getting extra gigs or upping your fees when you hit the big time!

Police And Thieves?

It may come as a relief to learn that there is no special unit of “music police” attached to the Inland Revenue. At least, that's what their press office told me! As far as they're concerned, you're just another tax payer. Do bear in mind, however, that that local paper in which your gigs are advertised can also be read by a tax officer. He could even be in the audience at your next gig! Like any organization that seeks to target people, for whatever reason, there is an element of intelligence gathering involved. In an age when the concept of “value for money” in respect of government departments looks here to stay, the Inland Revenue is no different to any other when it looks to improve its efficiency. In this case, by collecting all the tax owed to it. It may be that you are running the risk of becoming a victim of their drive for efficiency if you don't declare your gig earnings, an activity that places you outside of the law, and firmly in the “black economy”; fair game for the taxman.

Brass In Pocket

Whilst not wishing to alarm those who, in the words of Steve Miller, “take the money and run”, it is as well to be aware of the potential financial dangers inherent in the unholy alliance of gigging and the tax laws. With a degree of organisation, you can reduce your tax bill significantly, whilst enjoying the feeling that the tax inspector doesn't have your name in his appointments book. When you are “legit”, at least for tax purposes (we won't discuss your musical integrity here!), the crucial thing to remember, according to everybody I've spoken to on the subject, is don't take the “mickey” with the Inland Revenue! This is an organization committed to collecting taxes and if it can catch up with tax-dodging millionaires who have taken the most expert financial advice available, just think how easy a target you might be for the Inland Revenue. Before you pocket that money, remember, it knows where you live...

This article is copyright 1997 Steve Cobham, and is reproduced by permission. It first appeared in Sound on Stage magazine, since sadly gathered. The HTML is copyright 2003 Rick Booth. Neither may be reproduced without permission (which will usually be granted on request for non-commercial purposes).