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HMRC internal manual

Business Income Manual

Averaging: creative works

S221 Income Tax (Trading and Other Income) Act 2005

A trade, profession or vocation qualifies for averaging if the taxpayer’s profits from it are derived wholly or mainly from creative works.

HMRC regards the ‘wholly or mainly’ test as satisfied if more than 50% of the profit is derived from qualifying creative works.

‘Creative works’ are defined as, literary, dramatic, musical or artistic works or designs created by the taxpayer personally or, if the qualifying trade, profession or vocation is carried on in partnership, by one or more of the partners personally.

Generally these are works which are intellectual property of the creator, protected by law. The terms are defined in the Copyright Designs and Patents Act 1988 in relation to UK property. The relief also extends to similar property protected under foreign jurisdictions. Profits may be derived by allowing others to reproduce the creative works (for example, authors’ royalties or advances on royalties) or by outright sale.

Someone who is providing a service will not qualify as their income is derived from services rather than from creative works. For example, consider the case of a solicitor and assume that all her work is done in writing. Each letter, opinion, note, etc is a creative work because written material is protected by copyright irrespective of artistic merit and comes within the term, ‘literary works’. But the solicitor does not derive profit from these literary works. Rather, they are evidence of the work which the solicitor has done in providing legal services in return for fees. Creation of them is an incident of the work of the solicitor but she does not derive her income from them. So she does not qualify for the relief. It would be different if the solicitor designed a legal form and then made royalties which gave rise to more than half her profit by allowing others to reproduce it, but that is a rare occurrence.

The work may be physical property (for example, sculptures or paintings) but the relief does not apply to profits derived from works of craft (for example, furniture making or dress making).

Because of the requirement that the taxpayer or his or her partners create the work personally, the relief does not apply to people who manage the creation of work created by employees or others who are not partners.