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CLAUSE
71: CREATIVE ARTISTS: RELIEF FOR FLUCTUATING PROFITS
SUMMARY
1. This
clause and Schedule replace the income spreading rules for authors
and creative artists with a system of averaging profits over consecutive
years
DETAILS
OF THE CLAUSE AND SCHEDULE
2. Subsection
(1) inserts a new section 95A into the Taxes Act 1988. Section
95A provides that a new Schedule 4A Taxes Act - a system of profits
averaging for creative artists- shall take effect for the year 2000-01
and subsequent years of assessment.
3. Subsection
(2) inserts the new Schedule 4A into the Taxes Act. This Schedule
is set out in Part I of Schedule 24 Finance Bill.
4. Subsection
(3) repeals the current income spreading provisions for authors
and creative artists for payments receivable on or after 6 April 20001.
5.
Subsection (4) provides that Part II of Schedule 24 of the
Finance Bill shall contain consequential amendments.
SCHEDULE
Part 1: Schedule
4A
6.
Paragraph 1 introduces the new Schedule 4A to the Taxes Act
1988.
Schedule 4A
7.
Paragraph 1 provides for an individual to make an averaging
claim if his profits from a qualifying trade, profession or vocation
fluctuate from one tax year to the next.
8.
Paragraph 2 defines a qualifying trade profession or vocation.
In essence it is one which earns its profits, chargeable to tax under
Case I or II of Schedule D, wholly or mainly from the creation of
literary, musical or artistic works, or of designs. These creative
works must be created by the taxpayer personally or, if the business
is carried on by a partnership, by one or more of the partners.
9.
Paragraph 3 provides that an averaging claim can be made if
the profits from one of a consecutive pair of years are less than
75% of the other, or if the profits for one year are nil.
10.
Paragraph 4 specifies that an averaging claim cannot be
made for:
- a year preceding a year for which an averaging claim has already
been made;
- a year in
which the taxpayer begins or ceases to carry on the trade, etc;
or
- a year in
which the trade, etc begins or ceases to be a qualifying trade,
etc as defined in paragraph 2.
11.
Paragraph 5 sets out the time limits within which a claim must
be made. The normal rule is that a claim must be made no later than
twelve months after the 31st January following the later
of the two years being averaged. This may be extended where profits
are adjusted for some other reason.
10.
Paragraph 6 sets out the method by which the claim is to be
calculated. Where the profits for one year are no more than 70% of
the profits of the other year, or where the profits for one year are
nil, the profits of the two years are simply averaged over the two
years.
11.
However, if the profits of one year are more than 70%, but less than
75% of those of the other year, the averaging is calculated as follows:
- Take three times the difference between the two years’profits
(D)
- Deduct 75%
of the profits for the higher year (P)
- Deduct the
result of D-P from the taxable profits for the higher year and
add it to the profits of the lower year.
This
method avoids a disproportionate change to the tax bill near the point
where averaging is not allowable.
13.
Paragraph 7 provides that an averaging claim is given effect
in the later of the two years concerned ( so a claim would be made
on the self assessment return for the second year) by adjusting the
liability of that later year.
14.
Paragraph 8 provides that a taxpayer making an averaging claim
may amend or withdraw claims to any other reliefs provided for in
the Taxes Acts , or submit a new claim to such reliefs, at any time
within the time limit for claiming averaging.
15
Paragraph 9 provides the mechanism for giving effect to late
claims made under paragraph 8. As with averaging itself, relief is
given in the later of the two years concerned.
16.
Paragraph 10 provides that where the profits for either or
both years change after an averaging claim has been made the claim
is disregarded but a further claim may be made.
17.
Paragraph 11 clarifies that references to profits from a qualifying
trade, etc are to profits before making deductions for losses sustained
in any tax year. If provides that if the taxpayer sustains a loss
from the qualifying trade, etc in the tax year, the profits for the
purpose of averaging are nil.
18.
Paragraph 12 clarifies that references to amounts chargeable
to tax are references to amounts chargeable after taking into account
any relief or allowance claimed.
19.
Paragraph 13 provides that any reference to a claim includes
a reference to an election or notice. It also provides that two or
more claims by the same person are associated if each of them is either
an averaging claim, or another claim involving more than one year
to be given effect in a later year, and the same tax year is the earlier
year for both claims.
20.
Paragraph 14 clarifies that in this Schedule “tax year” means
a year of assessment.
Part II: Consequential
Amendments
21.
Paragraph (2) amends Section 46C(3) of the Taxes Management
Act 1970 (jurisdiction of the Special Commissioners) to delete those
income spreading provisions that are to be repealed. Appeals concerning
claims to averaging will fall within the jurisdiction of the General
Commissioners. This paragraph will apply to claims relating to payments
receivable on or after 6 April 2001.
22.
Paragraph (3) amends the definition of associated claims in
Schedule 1B of the Taxes Management Act so that the treatment is consistent
with that in paragraph 13 of the new Schedule 4A. This amendment applies
to the year 2001-02 and subsequent years of assessment.
23.
Paragraph (4) amends section 537 of the Taxes Act 1988, which
extends the income spreading provisions for copyright income to public
lending right, to delete reference to those provision that are to
be repealed. This amendment applies to payments receivable on or after
6 April 2001.
BACKGROUND
NOTE
24.
Creative artists have the problem that they may spend a long while
making little or no profits whilst they are creating their work. During
this period they may be liable at basic rate income tax, or perhaps
not liable at all. If the work is eventually successful it may give
rise to large amounts of income which, potentially, attract higher
rate tax. They may also dispose of copyright instead of receiving
royalties and thus find themselves with a lump sum attracting higher
rate of tax, instead of lower annual sums which would not.
25.
In order to obviate these problems, creative artists are currently
entitled to spread certain specific items of income over more than
one year ( more detail is provided in paragraphs 28 to 33 below).
However, the rules are complex and the take up of these reliefs is
low. The intention is therefore to replace them with a system of profits
averaging, as already used by farmers. Such a system was proposed
in an Inland Revenue Technical Note of 23 June 2000, Reform of
the taxation of intellectual property, goodwill and intangible assets,
and favoured by a majority of those who commented upon the proposal.
26. The
new system will enable creative artists to average the profits of
consecutive years thus ensuring that they can make best use of their
personal allowances and lower and standard rate bands.
For example, without
averaging an author’s profits might be:
Year 1
3,000
Year 2
45,000
In the first of
these years the author might have unused allowances and in the second
he or she might be liable to tax at the higher rate of 40%. Averaging
would result in the tax bill being computed as if the profits were
£24,000 each year so the personal allowances would all be used and
the higher rate liability would be eliminated. Moreover, the averaged
profit in year 2 can be used in an averaging claim with year 3. So,
for example if the result for year 3 was a loss (treated as a profit
of nil for averaging) it could be averaged with the profit of £24,000
for year 2 with so that the tax for years 2 and 3 would be recomputed
as if the profit was £12,000 each year.
27. By contrast
with the current rules for literary, etc spreading rules,
- there is no requirement that the claimant must have taken more
than 12 months to create the work. This will enable a greater
number of people to claim;
- profits
are averaged rather than individual items of income from particular
works being spread, This is substantially simpler;
- people who
are partners in a creative artistic trade or profession can claim.
Partners cannot claim literary, etc spreading.
Income spreading
for creative artists
28.
The present creative profession provisions in the Taxes Act
1988 apply to items of income of particular types. The provisions
to be repealed are sections 534, 535, 537A and 538
29.
Section 534 applies to payments to authors of literary, dramatic,
musical or artistic works who assign, wholly or partially or grant
any interest in copyright or by licence. It allows such persons who
have spent more than 12 months creating a work to spread backwards:
- royalties received within two years of publication
- and/or lump
sums (whenever received) from the assignment of copyright
If
the work took more than 12 months but less than 24 months to create
then half of the income is treated as receivable when it was actually
receivable and half 12 months earlier. If the work took more than
24 months to create then 1/3 is treated as receivable when the sum
was actually receivable, 1/3 12 months earlier and 1/3 2 years earlier.
30.
Section 535 provides that the same people as above who create works
protected by copyright can spread forward over a maximum of six years
- lump sum payments (including a non-returnable advance of royalties)
received for assigning that copyright, or
- lump sum
payments received for granting a licence for a period of at least
two years where
the assignment or grant of a licence is made more than 10 years
after the first publication of the work.
31.
Section 537 extends sections 534, 535 (and 536 which is not being
repealed) to public lending right.
32.
Section 537A applies to payments to designers of designs or authors
of registered designs who assign, wholly or partly, or grant any interest
in designs by licence. It mirrors section 534.
33.
Section 538 applies to payments to artists for the sale or creation
by fee or commission of paintings, sculptures or other works of art.
An artist who is engaged in making a work of art for more than 12
months, or makes a series of works of art for an exhibition over a
period of more than 12 months, may claim backwards spreading very
similar to that provided for authors under section 534.
Farmers' averaging
34. Farmers'
averaging was introduced in 1978 in recognition of the fact that farm
profits may vary substantially from year to year as a result of circumstances
outside the farmer's control.
35. Paragraphs
3 to 14 of the new Schedule 4A to the Taxes Act (the rules for making
and implementing averaging claims) are based on the existing rules
for farmers’ averaging in section 96 of the Act and paragraphs 3 &
4 of Schedule 1B Taxes Management Act 1970. The new rules are written
in the style used by the Tax Law Rewrite Project in their rewrite
of the rules on farmers’ averaging. The rules on farmers' averaging
were exposed for comment in Chapter 3.13 of the Tax Law Rewrite Exposure
Draft No 10, published in May 2000. The draft clauses were on pages
95 to 98 of Volume 2 and the commentary on pages 100 to 101 of Volume 1.
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