Tax, VAT, And Business For Musicians: The Key Points

Are you employed or self employed?

Professional musicians will normally be classed as Employed or Self-Employed. The majority of working musicians are self-employed but there are employed roles such as a peripatetic teacher or full-time orchestral musician. It is not uncommon for musicians to have multiple income streams and you may find you’re employed for some work and self-employed for other work. For example, if you’re employed to teach in a school during the week and gig in a function band at weekends as a self-employed musician. If you are employed, this means your income is taxed at source and your employer will take care of your taxes through PAYE. If you are self-employed, this means you are responsible for reporting and paying your own tax to HMRC using Self-Assessment.

What is Self-Assesment?

Self Assessment is a system HM Revenue and Customs (HMRC) uses to collect Income Tax. If you are self-employed you must report your income by completing your Self Assessment (Form SA100).

When do I need to register for Self-Assessment?

You must register for Self Assessment with HMRC if your turnover is more than £1000 in any tax year. You must register by 5th October after the end of the tax year where you are required to file a tax return – for example, if you need to file for the 2023/24 tax year, you should register by 5th October 2024. If you miss this deadline, you may have to pay a penalty. The deadline for online filing, and payment of any tax due is the 31st January after the end of the tax year.

What is the tax year?

The tax year runs from April 6th - April 5th.

How do I work out how much tax I owe?

HMRC will work this out for you. As a sole trader all you need to do is provide your overall turnover and any allowable expenses to HMRC. To avoid any stress, make sure you keep good records of your income and keep all receipts for your business expenses.

What is the difference between turnover and profit?

Turnover is another word for sales revenue. If you have made 100 sales and your service is priced at £1000, this means your turnover is £100,000. To work out your profit, you need to know how much it costs you to provide your services. If it cost you £150 to provide your service for each sale, your total costs were £15,000. This means your total profit is £100,000 - £15,000 = £85,000 (Turnover - Expenses = Profit)

What are allowable expenses?

As a self-employed musician, you will incur various costs when providing your professional services. You can deduct some of these costs to work out your taxable profit as long as they are allowable expenses. For example, If you have a turnover of £35,000, and you claim £5,000 in allowable expenses. You only pay tax on the remaining £30,000 - this is known as your taxable profit.

If you run a limited company, different rules apply.

Some examples of allowable expenses (cash basis):

• office costs, for example stationery or phone bills
• travel costs, for example fuel, parking, train or bus fares
• clothing expenses, for example uniforms
• staff costs, for example salaries or subcontractor costs
• things you buy to sell on, for example stock or raw materials
• financial costs, for example insurance or bank charges
• costs of your business premises, for example heating, lighting, business rates
• advertising or marketing, for example website costs
• training courses related to your business, for example refresher courses
• equipment

Costs you can claim as a capital allowance

If you use cash basis accounting, and you buy a car for your business, you can claim this as a capital allowance. All other items should be claimed as expenses. Different rules apply if you’re using accrual accounting.

Accrual vs Cash Basis accounting?

Accrual accounting means you must include every invoice you send or receive when completing your tax return, even if the invoice has not been paid. This means you would pay tax on income you expect to receive from an invoice, even if the customer has not paid it yet. Accrual accounting is usually recommended for larger businesses but could be worth considering if you’re expecting quick growth.

Cash basis means you only declare money earned when it actually comes in or out of your business. This means you’ll only pay tax on money actually received in the accounting period. Cash basis usually suits sole traders and partnerships well until your turnover exceeds £150,000. Be aware that only certain types of businesses can use cash basis accounting.

Partnerships and other legal entities for bands

There are multiple ways you can set up as a business. Each of the below set-ups have their pros and cons with regards to ease of management and limiting your liability. It’s worth speaking to your accountant about the best approach for your circumstances.

Sole traders - Self employed musicians who work for themselves are usually classed as sole traders. As a sole trader you can keep all your business’s profits after you’ve paid tax on them. You’re personally responsible for any losses your business makes. You must also follow certain rules on running and naming your business. You can be a sole trader while also being in a partnership.

Partnerships - The Partnership Act 1890 defines a partnership as two or more individuals ‘carrying on a business in common with a view of profit’. This means that when musicians come together to create a band or other musical ensemble with the intention of making profit, by law the musicians/sole traders will generally be considered to have formed a partnership (unless there are contracts in place that state otherwise). It is a good idea for bands and other musical ensembles to have a written partnership agreement signed by all members. The partnership must be registered with HMRC and nominate one partner to manage the partnership’s tax returns and business records. All partners personally share responsibility for the business. Partners share the business’s profits and each partner pays tax on their share.

Limited Partnerships - Limited partnerships are made up of two different classes of partner, General partners and Limited partners. General partners are responsible for managing the business and have no limited liability. Limited partners do not have any control over business decisions or the operations of the business but their liability is limited to the amount they contributed to the partnership. All partners pay tax on their share of the profits.

Limited Liability Partnerships (LLP) - With Limited Liability partnerships, each member pays tax on their share of the profits, just like an ordinary partnership, but isn’t personally liable for any debts the business can’t pay. An LLP must have at least 2 designated members and any number of ordinary members. When setting up an LLP, there must be an LLP agreement that states how profits are shared among members, who needs to agree decisions, members’ responsibilities, and how members can join or leave the LLP. Members must carry out all their duties and legal responsibilities as set out in the LLP agreement. Designated members have more responsibilities including managing the LLP accounts and registering the LLP for self assessment with HMRC.

Limited Companies - A limited company is a separate legal entity from the people who run it. The main advantage of a limited company is it provides the owners, known as shareholders, with limited personal liability. It can be a little more complicated setting up a limited company and it will mean either paying band members as employees or making each member a shareholder in the company to be paid in dividends. A limited company must have at least one shareholder and one director. Be aware that the company will have to be registered with companies house and for corporation tax and therefore accountants would usually only recommend this set up to very successful bands with a high turnover.

What is VAT?

VAT (Value Added Tax) is a tax added to most products and services by VAT registered businesses. Most services that musicians provide will be charged at the standard rate of 20%. This means that if you become VAT registered you will need to account for VAT when you invoice your customers. Be aware that different rules apply when you’re working outwith the UK.

When do I need to register for VAT?

If your business’s turnover exceeds more than £90,000 (This recently changed from £85,000) in any 12 month period, you must register for VAT. This means that if you are in a band and you play 50 gigs between March 1st and December 31st (only 10 months) and charge £1800 per booking, your band will have a turnover of £90,000 and must register for VAT. If this is just a one off occurrence and your turnover does not regularly exceed the threshold, you may be able to come to an arrangement with HMRC.

What are the benefits of being VAT registered?

Although being VAT registered comes with extra admin and a few other downsides, it also has a few benefits for your business. The first of these is that when a potential customer sees that you’re VAT registered, it lets them know that you run your business legitimately and adds an element of trust.

Another benefit of being VAT registered is that you will be more attractive to corporate clients. If your client is VAT registered themselves, they will be able to claim back the VAT from HMRC effectively giving them a 20% discount. This brings us on to the main benefit to your VAT registered business. Whenever you make a purchase for your business such as a new PA system or guitar, you’ll be able to claim back the VAT. This also applies to any Music Marmalade fees.

How to prepare for VAT

Always keep your business records and accounts up to date. Get to know your key numbers such as turnover, expenses, and profit so you know if you’re approaching the £90K VAT registration threshold. If you miss the point when you should have registered, you could easily find yourself undercharging your clients and have a sizeable backdated VAT bill plus fines. When your turnover is getting close to the threshold, book a meeting with your accountant to discuss your approach. If you feel you’re approaching the maximum number of gigs you can handle in any 12 month period and don’t plan on raising prices any time soon, you may decide to keep your business under the £90K threshold by limiting your gigs. If you know your business has good growth potential then you’ll need to get VAT registered.

How to price your service when you’re VAT registered

Pricing can be quite a delicate subject and there can be many factors to consider but the first thing to remember here is if you’ve reached the VAT registration threshold, your business is clearly becoming quite successful and you’re obviously providing a desirable service that your clients value. When musicians become VAT registered they usually take one of three approaches:

1. Keep the prices the same - This usually means your prices will remain super competitive but if you want to take home the same kind of money, you’ll need to work more to make up for the 20% of turnover going to VAT.

2. Raise your prices by 20% - If you have a lot of demand for your services and your diary is always full then you’ve probably been undercharging and this may be a good approach.

3. Raise your prices by 10% - Raising your prices 10% shouldn’t have a massive impact on your sales if you provide a quality service. Raising your price by 10% can be a nice middle ground as you’ll likely still be priced competitively plus you will have the added benefits of being able to reclaim VAT on any business expenses and provide your clients with an extra level of trust and legitimacy by being VAT registered.

Final Thoughts

When you’re first trying to get your head around running a business as a musician it can get overwhelming but there are plenty of resources out there to help get you started and help you make the right decisions. The Musician’s union and HMRC provide lots of information on the subjects above and can be a good starting point for those wanting to know more.

If you feel we’ve missed something in this article and you think other musicians should know about it, or if there’s an inaccuracy you’ve spotted, we’d love to hear from you. Please message hello@musicmarmalade.com and let us know your thoughts.