They say that the only certainties in life are taxes and death, but there is perhaps a third: the paperwork. And while the tax advantages of setting up a company through which to work can be very attractive to authors whose income has reached a critical level, the complications and cost of ensuring the correct paperwork should not be overlooked.
We explore this complex topic in our new Guide to the Pros and Cons of Forming a Limited Company with the immense help of Barry Kernon of accountants HW Fisher and Maria Dawson, in-house lawyer with United Agents. Click here to find the Guide on our Advice page (free for members)
The Guide addresses the complex range of tax and VAT implications and highlights a range of other considerations. Some of the areas about which we are most often consulted by members are set out below.
If you set up a company only after books have already been completed, it may by then be too late to be able to assign the existing copyrights in a tax efficient manner. You can sell an existing copyright to the company, but only at market value – which must be included in your self-assessment return and on which you will have to pay income tax.
Copyright assignments need to be in writing and properly worded, especially if no money is changing hands, and it is generally advisable to involve lawyers. You also need to make sure that existing contracts with publishers’ other licensees reflect the new position.
If your copyrights are owned by your company, any publishing/production contract has to be with the company, accompanied by an Inducement Letter in which you personally guarantee to do certain things – like write the book – and you indemnify the publisher against costs and liabilities if the company cannot meet such obligations itself. Some publishers have limited experience of drafting such agreements.
If you transfer the copyright in existing works to a company, your publishing contracts for those works must be amended, via a Novation Agreement. But UK publishers and other licensees are not always amenable to executing Novation Agreements if they are entered into by you for purely tax reasons, or they may not understand the process. There will be situations where a Novation Agreement is not possible. And publishers increasingly insist on drafting bespoke Novation Agreements and may well charge you for the cost of their expertise and time incurred.
You can run up against the same problem later on, if there comes a time when it is no longer beneficial or economic to run a company. Any such change of plan gives rise to legal as well as accounting issues, including the need for new Novation Agreements transferring rights back from the company to you, at which point, publishers and other licensees can become exasperated. Some will simply refuse to engage with a whole new raft of paperwork.
Setting up a company does not greatly help you avoid liabilities – and does bring its own legal obligations. It is not possible to limit your liability in libel cases, and where a company could in theory offer some protection (e.g. in the face of a claim of copyright infringement), publishers and other licensees generally anticipate this by insisting that you give a personal indemnity.
The main obligations of a company – and there can be significant penalties for non-compliance – are that it must have its own bank account into which all the earnings are paid; it must produce accounts in statutory format to be submitted to HMRC and Companies House – and a short version of your accounts will be publicly available to anyone who wants to look. Corporation tax returns have to be filed electronically once a year. All of which involve accountants more substantially than for self-employed tax returns, so their fees are generally higher.
Last but not least, you need to be sure that there is coordination between what your Will says about your copyrights, and what your company allows. For further advice on Wills and inheritance, click here to find the Guide to Your Copyrights and Papers after Death on our Advice page (free for members).
The Guide to the Pros and Cons of Forming a Limited Company addresses all the above in more detail, including tax and paperwork.