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Not sure HMRC is correct on this

Not sure HMRC is correct on this

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I have a client who is American but lived in this country for decades.  He has just wirtten a book in his spare time which he had self published in America.  He has received a small sum for royalties in dollars that is banked in America.

I was confused as to whether the royalties go as sch D case vi or as self assessment trading income.  I thought is was case vi as this is a one off authorship in which case he lost any relief on the publishing costs (which will make 2010/11 loss if included).

Rang Revenue asking for confirmation of how to deal with the royalties and expenses with an Inspector but got some-one lower down so not sure the info. is correct.  She said to deal with as a trade and claim expense against the royalty income which can then be set against total income of client.  Is this correct?  Do I actually do anything with it at all as client also fills in US Tax Return and should this go on that alone?

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By George Attazder
05th Sep 2011 12:57

I'd agree with HMRC...

... unless it was a hobby and he only published it for his self adulation, I'd suggest that it was a trade.

It may only be one book, and he may have written it in his spare time, but books don't just happen. Time and effort will have been devoted to it (even though it might have been spare) and by incurring publishing costs, there is evidence of him seeking to profit from those efforts.  Those are badges of what is a trade (or more correctly, in the case of an author, a profession) and the source should be taxed as such.

If it's a hobby, the costs are his, but the income should only be taxable if it exceeds those costs.  Even then, I'd regard it as a hobby trade, taxable under DII.

I've only ever seen DVI treatment of royalty income where a copyright source was acquired and held as an investment.  One off "sell your story" type contracts are also DVI (there's a case involving a wife of one of the great train robbers, I seem to recall).

Before anybody points it out, I know that DII and DVI don't technically exist anymore, but excuse the old folk practising the old ways if you will.

As for the US/UK Return issue, it goes on both Returns.  A UK resident is taxable in the UK on their worldwide income (including this UK trade) and a US citizen is taxable in the US on their worldwide income.  If there were a tax liability, double tax relief would be available.

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By micki
06th Sep 2011 11:01

Thank you so much for that full and comprehensive reply.  I really appreciate it.

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