Self-Employed: Deducting Costs for Future Financial Year/Deferring Income?

tomsheff

Hi there,

I'm an author who was fortunate enough to earn £108,000 in royalties last year. However, this put me into the dreaded 60% marginal tax bracket. I submit my returns each year via self-assessment.

So the plan this year was to hire external writers to work on books that complement my own, becoming a small publishing house as well as writing my own. This would naturally be quite a risk for me and also require a lot of investment.

Usually I deduct my costs (editors, marketing, etc.) at source to give my accurate profit, which is then submitted as a self-assessment at the end of my financial year.

However, given the investment I intend to undertake, is it possible to defer some of my income? Or, looking at it another way, could I deduct the money as a cost today, to be spent on the new writers I will hire during the next financial year?

It seems such a waste to have £8,000 of my income taxed at 60%, when I am looking to make such investments. It would allow me to spend £8,000 on new writers while only being out of pocket £3,200 of my own money.

If I were deducting costs in the same financial year, it would be a non-issue, so it feels a shame to pay such a high tax rate because I missed the cut-off point. I obviously don't want to fall foul of any tax laws, though!

Thanks in advance

BoGoF

You may be able to average your profits

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim84000

A bit light reading!

tomsheff

Thanks, I will take a look.



I'd rather not get too creative with my accounts, though, and the preference would still be to deduct the costs in this financial year. Perhaps if I put them into reserves/funds of some kind, so they could be deducted from profits today?

BoGoF

What you are suggesting is 'creative accounting'

00ec25

tomsheff wrote: »

Thanks, I will take a look.



I'd rather not get too creative with my accounts, though, and the preference would still be to deduct the costs in this financial year. Perhaps if I put them into reserves/funds of some kind, so they could be deducted from profits today?

you cannot claim income or costs in an accounting period to which they do not relate ("earned").
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim40075

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim31080

That is a fundamental accounting principle and therefore is how it is expected that your taxable profits will be presented.
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim31005

As bogof says, and as mentioned in the link above, your best option is to then claim averaging of profits (but not income or cost "creative" shifting!)

Pennywise

You can only include costs if they've actually been incurred. You can't just "create" reserves etc for future spending. Even if you actually gave them money, unless they've done work for you, you still couldn't have claimed it as it would just be a prepayment which needs adding back. Either look at averaging, or the other option is to change your year end, i.e. extend it and spend the money in the extension period, the the reduced profits for the longer period are time-apportioned.

antrobus

tomsheff wrote: »

....If I were deducting costs in the same financial year, it would be a non-issue, so it feels a shame to pay such a high tax rate because I missed the cut-off point ....

Not necessarily.

Basic accruals accounting would mean that the cost of an advance to an author in respect of a book that has yet to generate any revenue would be work in progress. But I don't know whether or not there any specific rules or reliefs that apply to publishers.

As you are an author with a six figure income who wants to set up a publishing business, I'd suggest you get a proper accountant.