Q: Are earnings from commissioned portraits taxed differently than other income? I am soon to exhibit at an ‘art week’ and hope to generate some interest in what has been up to now a hobby.
Feb 20 2007
Answered by: Clive Lewis Ask a question
The issue of when does a hobby become a trade and therefore within the rules for Income Tax has many grey areas. It may even not depend on whether the “trade” is making a profit. There should be a reasonable expectation of profit and the trade cannot be conducted in an “uncommercial way”. One factor will be how profitable each commissioned portrait will be. I would assume that you render a charge based on the time painting a portrait takes. This should produce a profit before charging your expenses such as a room in your house or hire of a room/ studio where you work on the portraits. Your question implies that it is a lack of demand which has stopped you carrying on the trade previously. Consequently if the demand increases you will be deemed to be carrying on a trade for tax purposes.
As far as VAT is concerned commissioned portraits are an economic activity for the purposes of VAT and Community law. An artist carrying on a hobby would not be treated as carrying on an economic activity solely because he sold some of his work occasionally. It would depend on frequency and whether he produced the work with a view to selling it. However, commissioned portraits would be treated as a business from the start.
Assuming that your commissioned portrait business is a trade for tax purposes it is probable that you will be operating as a sole trader. If so, profits (or losses) will be taxed under Income Tax and National Insurance Contribution rules. At the end of the tax year (5th April) in which you commenced trading in your own business you must complete a Tax Return including a Self Employment section.
Basically if your turnover is under £15,000 you only need to fill in figures for turnover, expenses and profits. If the turnover of the portrait business is greater than £15,000, a detailed profit and loss and balance sheet will be required to help complete the Self Employed section of your tax return. So you will need to keep a record of the business’ income and expenses in order to produce a set of accounts. If you buy equipment you are allowed a proportion of the cost each year (called capital allowances) as a deduction from your profits for tax purposes. If you are working from home a proportion of the house expenses might be allowable as will the costs of travelling related to the portrait business. If your business annual turnover reaches £61,000 in a year (2006/7 limit) you must register for VAT. Failure to do so is a criminal offence.
Profits from the portrait business will be added to any other income you received in the tax year to calculate your total taxable income. Tax on the portrait business profits is payable in two instalments, on 31 January and 31 July, together with an adjustment of any balance owing the following 31 January. If your Income (including profits from the portrait business) exceeds £5,035 tax is payable at 10%. If it exceeds £7185 tax is liable at 22% and if it exceeds £38,335 (2006/7 rates) you will be liable to tax at 40%.
The basic National Insurance Contributions (NIC) is called Class 2 and for 2006/7 it is £2.10 per week usually paid by direct debit in 4 or 5 weekly instalments. But if your self employed earnings are less than £4,465 no Class 2 is payable. The additional NIC is called Class 4. On profits between £5,035 and £33,540 the Class 4 rate is 8% and on profits above £33,540 it is 1%. There are some exempts from Class 2 and 4 NIC contributions for the self employed such as if you are over the state retirement age.
You have 3 months to notify HM Revenue and Customs (HMRC) if you start a new business. You can obtain a form CWF1 from the HMRC website or call the Self-employed Registration Helpline on 08459 15 45 15.
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