Pay Your Dues Part 1

Any income you make from photography is taxable and should be declared to the Inland Revenue. In the first of a two-part feature, Lee Frost outlines the benefits - and penalties - of not doing this and offers advice on how to keep your books in order.

Once you start making money from photography, be it selling the odd picture to a magazine, achieving sales through a picture library, or taking on occasional commissioned jobs, you are, in effect, running a small business.
The knock-on effect of this is that by law you are required to keep records of all business transactions - both money you have earned from your photography and expenses you have incurred in order to make that money. You also have to prepare 'books' of these activities so you, or an accountant, can produce accounts and complete a tax return form which will enable the Inland Revenue to assess your photographic income and calculate any income tax you may have to pay. Depending on the type of work you do, or the level of income it provides, you may also need to register for VAT (Value Added Tax).
This side of freelance photography is the least interesting of all, so many photographers tend to ignore it. However, to do so is dangerous as you can soon find yourself in a complete muddle; not knowing how much you've earned or how much you've spent and long term either find yourself in trouble with the Inland Revenue for not declaring your income (which, in these days of self-assessment carries nasty financial penalties for late payment and late submission of tax returns) or being out of pocket because you are paying more tax than you really need to.
The important thing to remember is that if you operate as a part-time freelance photographer and declare any income you receive, you can also offset all your photographic expenses against that income. In the vast majority of cases means the business will almost always work to a loss on paper so no income tax will be payable anyway.
These expenses don't just cover the cost of film and processing, but any photographic equipment you purchase, office equipment such as computers, filing cabinets and stationary, the cost of mailing work out to clients, telephone calls that are business related, any travel expenses you incur while pursuing photographic activities - putting petrol in your car, flights, hotel bills and so on.
You may also be able to offset any losses your photographic business incurs against your income from other sources - ie your full time job - although this is a bit of a grey area so don't bank on it.
A further benefit of keeping records and declaring your income from photography is that as that income grows and your photographic activities expand, you already have systems in place to ensure its smooth running.
As soon as you start operating as a freelance photographer, on whatever level, I therefore advise you to take the following steps:

1 Open a business bank account
It's tempting to use your personal bank account for your freelancing activities: depositing any income it generates; writing cheques to pay for materials, equipment and other items. However, you will be much better organised if you open a separate account just for your freelance business, no matter how infrequently you use it. There are several advantages to this.

• Once you have one, it's ready and waiting when your business begins to grow.
• It allows you to keep track of how much you're earning and how much you're spending as a result of your freelancing activities.
• It keeps your personal and business finances separate. If you use just one account, it's easy to spend personal money on business expenses, or business money on personal expenses, and end up in a muddle.
• Keeping accounts is much easier, as all business transactions will appear on your bank statements and you don not have to sort them out from all personal income/expenses.
• It gives you access to certain benefits with your bank, such as free banking for the first year when you open the account, preferential deals on overdraft facilities and so on.

2 Contact the Inland Revenue
Write to your local office - you will find it in the phone book - and tell them you are now operating as a part time freelance photographer, giving a date for the start of your business. They will then enter the business onto their records, provide you with literature on taxation and keeping accounts and send a tax return form to you each year in which you detail the financial side of your business activities.

3 See an accountant
As soon as possible, talk to a qualified accountant. If you don't already know one, or know someone who does, choose one from your local Yellow Pages or phone book and make an appointment. Explain that you have just set-up in business as a part time freelance photographer, then discuss the type of work you will be doing, how much you expect to earn, what you will need to spend and so on.
The most cost effective way to do this is by keeping your own accounts - in other words, entering all your income and expenditure details in an account book so your accountant can then analyse the figures and work out your profit or loss for each year and fill out your tax return form.
Many self-employed people do the latter themselves, but it's easy to get confused and make mistakes so I'd advise you to pay an accountant to do the job for you.
This will cost you 200-300 per year, but it's worth it because a qualified accountant knows exactly what you can and can't claim tax relief against, and will ensure you pay the absolute minimum tax required on the income you make - assuming your accounts show a profit.

4 Create an office
To run your business smoothly you need some kind of work area that you can dedicate to it. This can be tricky if you are working from home, but it really is important to establish office space that can house all your photographic equipment, pictures, accounts, records and anything else that's relevant to the business, not only so you known where everything is, but also so you have an organised area in which to work, and which other members of the family know is out of bounds. This could be a spare bedroom, a corner in a living or dining room or anywhere else that's big enough for a desk, computer, lightbox and filing cabinet.

Keeping accounts
The prospect of keeping records of all your financial affairs probably makes you break out into a cold sweat. Don't worry - we've all been there. The good news is, keeping accounts isn't as difficult or as time-consuming as it sounds providing you establish a system right away and you update your accounts regularly so you don't suddenly reach the end of the financial year and have hundreds of receipts and invoices to sort into date order then log into the accounts book. This happens all the time - I've seen friends try to make sense of a carrier bag full of receipts in no particular order, or try desperately to find receipts for things like cameras and lenses.
To prevent that, here's a brief rundown of the system I have been using for the last ten years of freelancing.
The heart of the system is a two-drawer steel filing cabinet (40 from places like Office World) containing a number of hanging files, each labelled with a plastic crystal tab so I can identify the contents. These include:

• Invoices outstanding
• Invoices paid
• Invoices logged
• Receipts logged
• Petty cash receipts
• Bank Statements
• Credit card statements
• Bank books
• Inland Revenue

I also have a set of open trays in my office, one of which is labelled 'Receipts'. Whenever a piece of paper is generated, for whatever reason, it is then immediately filed into the appropriate pocket for future reference.
When pictures are sold or a photographic commission completed, I generate an invoice on my computer and print out two copies - one to send to the client, and a second copy for my 'Outstanding Invoices' file. Once it's paid, I then clip any payment advice slips received to this copy and transfer it into the 'Invoices paid' file. This means all invoices are automatically filed in date order, which makes linking them to bank statements and logging them in my accounts book much easier when I compile my accounts. I can also check periodically to see which invoices are still outstanding, and send a reminder to the client.
Invoices should include all relevant details:

• The client's name and address
• The date the invoice was issued
• An invoice reference number. I use a numerical system of the year followed by the invoice number for that year - 01/105, for example, refers to invoice number 105 for the year 2001.
• A detailed breakdown of the charges so the client knows exactly what they are paying for. The exact requirements here vary from market to market. Calendar publishers usually want a list of pictures they have purchased the use of, the year of use and terms of use, such as exclusive calendar rights for one year. Some publishers will issue you with an order number or purchase order which must be shown on the invoice so the accounts department can link it with an authorised order. If you invoice for a commercial job then you need to list the number of rolls of film you are charging for, the amount of time spent on the job and so on.

All receipts for purchases/expenses associated with the business are transferred to a file tray so they are roughly in date order and in the case of plain till receipts I tend to write on the top what it was for - ten rolls of film, box of envelopes etc.
Once you start operating as a freelance, keep receipts for everything associated with your photography: cameras, lenses, film, processing, travelling expenses such as petrol, air tickets, car service and MOT bills, all insurance costs, hotel bills, telephone bills, meals, stationary, postage, pens, pencils, printer cartridges, computer discs, and anything else you can think of. If in doubt, keep it, and let your accountant decide if it's tax deductible.
This is where you can benefit from operating as a small business - you have to declare your income, but you can also offset legitimate expenses against that income. I even account for items such as outdoor clothing and footwear as I specialise in landscape photography, so these things are essential to my job.
Also, if I go on holiday with my wife or family, I offset some of the cost of the trip because without fail I always take photographs on those holidays, which end-up in my picture library and hopefully earn money. My attitude is if the Inland Revenue want me to pay tax on the money I make from my photographs then they must also accept any reasonable expenses associated with taking them in the first place.
It is vitally important that you keep those receipts, however, as you can't claim tax relief on anything unless a receipt is available - and no accountant will put expenses through unless you have proof that they were legitimate.

All that remains then is for you to enter all your earning and expenses in an accounts book so your accountant can analyse the figures and prepare your tax accounts.
If your photographic activities are strictly part time then you can wait until then end of each financial year before compiling them. However, as business increases it makes more sense to update your books on a more regular basis so you're not swamped. I'm VAT registered (see next month) so I have to update my books every three months to calculate the amount of VAT I need to pay to Customs and Excise. This means that come the end of my financial year (which runs from Dec 1st to Nov 30th each year) I never have more than three months' accounts to sort.
After each year, all records associated with the financial side of the business should then be placed in a box file, labelled and stored away once your accountant has finished with them. This is necessary by law - all accounts for the previous six years must be kept in case they ever need to be investigated.

Next Month
The art of double entry book keeping and the benefits of VAT registration

Keeping records of your business activities is vital, not only so you don't find yourself in hot water at a later date but also so you can take advantage of the benefits being above board can offer.

Your filing system needn't be anything too elaborate in the early days - for a number of years I managed quite well with a simple concertina file that kept all my paperwork in order.