Patreon and Tax
12th March 2020
Patreon is a great platform for artists and creators to turn their work in to cold, hard, reliable cash. It's part of the current wave of “alternative finance” options that has swept the UK landscape in recent years, turning hobbies into micro-businesses all over the country.
One of the big bonuses of Patreon over other crowdfunding-type options is that you know in advance how much you'll get making, and the money comes in more or less regularly, which makes your planning and cash flow situations a lot smoother. The platform basically allows your supporters to shoot you money either on a monthly basis or for each piece of work you put out. Where major commercial artists from Mozart to Shakespeare once relied on rich benefactors to keep them in powdered wigs and comically oversized ruffs, now anyone who loves what you make can contribute to your earnings – which, naturally enough, is what brings the taxman sniffing around.
Patreon's attitude to tax is pretty simple: you're basically on your own. They don't take any tax from the cash your supporters send you. Of course, that doesn't mean you don't have some homework to do to stay on the right side of the law. For one thing, outside of the US, you need to file a terrifying-sounding Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), or W-8BEN form. This simply gets you out of the sights of the United States' own version of the taxman.
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Once that's sorted, you'll also have to work out where you stand for VAT. If you've got supporters in the EU and your output is a digital service of some kind, the chances are you're going to run smack into VAT MOSS. Generally, Patreon has been taking care of this for EU creators, but Brexit is changing things in slightly unpredictable ways. The current advice on the HMRC website is that UK creators won't be able to use the UK VAT MOSS after the 1st of January 2021. After that, you'll either need to register for VAT MOSS in an EU member state or for VAT in each EU member state you sell digital services to. Patreon still recommends talking to a tax expert to make sure you don't run into trouble, and we're obviously in agreement on that!
With Patreon's top success stories raking in £107,500+ a month, you'd better believe HMRC's got its ears pricked up. This is all taxable income in the UK, which means you have to declare it in a yearly Self Assessment tax return. The Self Assessment system comes with a lot of paperwork to keep on top of, some very strict deadlines to hit and a boatload of uncomfortable penalties for messing up. On the other hand, it also comes with some opportunities. On top of the basic tax-free Personal Allowance (the amount you're allowed to make before you start getting taxed), you can also bring down your overall tax bill by claiming for the allowable business expenses you're shelling out to do your Patreon work. This is an enormous subject on its own, but the short and sweet version is that the essential costs of running your business (anything from art supplies to a proportion of your internet bills) can be used to bring down the amount of profits your business pays tax on. There's also a thing called the trading allowance, which could see your Patreon off the hook for tax altogether if you're making £1,000 or less per year through it. Again, professional advice can save you a lot of money, hassle and risk.
Taking a look at a typical Patreon business, for example, you might find that you qualify for tax relief on the costs of:
- Patreon's fee.
- Any currency conversion fees.
- The hosting and domain charges for your website.
- Any software or services you're using to manage your accounts or emails.
- Certain types of insurance you've bought for your work computer or phone.
- Any essential courses you've taken to support your business or improve your output.
When you're trying to keep your accounting bookwork as simple as possible, you can use the “cash basis” to declare your income and expenses as they actually happen. The more conventional “accruals basis” doesn't record the money you've spent until you've actually sold the thing you bought it to produce, while your income gets declared when you send your bill or invoice, rather than when it's actually paid.
Running a business can be tough but rewarding work, which is why so many people are using platforms like Patreon to turn a hobby they're passionate about into something more. Get in touch with any questions or problems you have. Whatever dream you're chasing or business you're building, you're better off with RIFT.
RIFT is the UK's leading tax rebate and tax return experts. A family run business in the tax industry since 1999.