This is an article written by James Taylor, Tax Manager at Saffery Champness LLP. It’s important to us here at Racing Mentor that you’re getting accurate information on a variety of subjects that will affect you as a driver. This is the first in a series of articles on tax for racing drivers.
It is a common misconception that anybody under the age of 18 years old does not have to pay tax. This could not be further from the truth. In fact, tax has nothing to do with your age. Instead, it’s all about how much you earn.
Only those who make a profit have to pay tax. In the UK, the first £12,500 of income per tax year is exempt from Income Tax. The majority of under 18-year-olds will not earn more than £12,500 each year which is why most people believe that they aren’t subject to tax.
In practice, anybody who earns more than £1,000 from any source in a single tax year may need to register with HMRC. This applies even if you consider yourself an amateur and racing is just a hobby.
Most drivers start trading as self-employed individuals, also known as a ‘sole-trader’, and will be responsible for submitting and paying their own tax. If you earn more than £1,000 per tax year you must register as ‘self-employed’ with HMRC.
Only when profits (after deducting all appropriate expenses) exceed £12,500 would the driver begin to pay Income Tax. There are however lower limits for National Insurance and any profits over approximately £8,500 per year would be subject to the charge.
What income should be considered
Prize money, appearance fees, sponsorship income, grants, and reimbursed expenses should all be considered as forms of income when working out your financial position and taxable profits.
You can deduct various expenses when working out the taxable profits. These include, but are not limited to, the following:
- Travel & subsistence
- Use of home as office
- Equipment and repairs
- Licenses and fees
- Capital allowances (the loss of value on assets, similar to depreciation)
Reporting and deadlines
Register as self-employed: 5 October following the end of the tax year when business started
Submit first tax return: 31 January following end of tax year when business started
Register for VAT
If total income before any expenses is expected to exceed £85,000 in the next 30-day period only – registration should be completed straight away and the taxpayer will be registered for VAT effective immediately
Once income exceeds £85,000 in the last 12 month period – Within 30 days from that date
Submit VAT returns by 7th of the month following the end of each financial quarter (usually 7th May, August, November & February)
How to structure your business
Most drivers will start off as a self-employed individual as this is the easiest way to run your business. However, once profits exceed £100,000 per year, it may be worth considering incorporating by setting up your own limited company.
Bank of Mum and Dad
A well-known fact in motorsport is that making a successful career requires a significant capital investment. Investment comes in many forms but the most common will be sponsorship.
It is possible for a family business to sponsor a child’s drive but careful consideration should be taken if this is to be claimed as a tax-deductible expense by the business. HMRC will adopt the approach that the sponsorship is personal in supporting the child rather than a business expense.
It is possible to claim the sponsorship as a business expense but care should be taken to provide supporting information and professional advice should be taken before entering into correspondence with HMRC.
For those taking part in overseas races, prepare to have withholding tax deducted off your winnings/fees by the local promoter. You also need to consider whether you have to file a tax return in the overseas country.
Once you have reached a point in your career where a significant proportion of your time is spent overseas, it is time to consider whether you need to pay tax in the UK or whether you can become resident in another (lower tax) jurisdiction.
It’s always work speaking to a professional about tax issues, especially if you’re earning significant amounts of money through sponsorship.