Thanks to the awesome Julia Haigh I’m not even going to try because her very engaging and catchy video presentation is so much better than anything I could do. It is her winning entry in a competition organised by the Association of Accounting Technicians to find the best video explaining the principles of double-entry book-keeping in under 3 minutes. Loving the tune!

Fortunately a mastery of double-entry is not essential for a successful career as an escort. Our TaxRelief Diary  is a simple to use book-keeping system specially developed for escorts and it doesn’t require you to know the slightest thing about double-entry. It costs just £12.50, but for one week only Lulu.com (who print it for us) have a 15% sale - just quote the coupon TENYEARUK and you can get it for £10.63 plus postage & packing. This offer expires on Friday 18 May.

My apologies to anyone who was expecting an article about double-entry sex and found themselves watching a video about debits and credits. You may be interested to learn that while oral sex is often known as French, and anal sex as Greek, the equivalent name for double-penetration is Italian, in honour it is believed of Luca Pacioli the 15th century Italian monk and inventor of double-entry book-keeping.

What if I am a full-time student, do I still have to pay tax?

Students are liable to tax on their income in exactly the same way as anybody else, although in practice few full-time students pay tax because their income is usually less than the personal tax allowance – the amount of income anyone resident in the UK can receive before they pay tax – which at the moment is £8,105.

As an aside, there is a special tax form, P38(S), for students with vacation jobs, which is designed to ensure their employers do not deduct tax from their pay. This is not because there is a special tax regime for students, it is simply an administrative arrangement to avoid students getting tax deducted from their wages and then having to claim it back at the end of the tax year after it is clear their total income is less than the Personal Allowance. There is no equivalent arrangement for part-time self-employment, and there does not need to be, because tax on self-employment is worked out after the tax year has ended so it can take into account total income and personal allowances.

Most of the money a full-time student receives is exempt from income tax and can be ignored. This includes student loans, grants, bursaries from your university, contributions from parents, gifts from doting aunts, sales of last year’s text books, poker winnings …  For the typical student the only income which is taxable – if it amounts in total to more than the Personal Allowance - is from part-time employment (Waterstones, Weatherspoons etc), part-time self-employment (escorting, Tupperware party organiser), or one-off cash-in-hand jobs (here’s £30, put on that turquoise armadillo costume and wander round the streets of Nottingham handing out these leaflets).

So if you are a student doing some part-time escorting work you are a self-employed part-time business owner just like any other part-time escort. Whether you are liable for income tax or national insurance will depend on how much you earn each tax year. The first step is to work out your self-employed profit, which is the total you receive from punters from which you can deduct allowable business expenses. You then need to add on any income from employment and any other income you receive. If that all amounts to less than the Personal Allowance (£8,105 in the year to 5 April 2013, £7,475 last year) there is no tax payable and no need to register. However you will still need to register if your self-employed profit alone is more than £5,595 (£5,395 last year). That is because the NI thresholds work differently.

In all likelihood you won’t know when you start how much you are going to earn. You might want to put off the question of registering until you have had two or three bookings and have a better idea of how much work you want to do and how much you could earn.

If you decide to register but you think your profit will be below £5,595 (the Class 2 NI exception limit) you can apply on the registration form not to pay Class 2 NI, which is normally £2.65 per week. If it later transpires that you do earn more than that you will have to pay up. Bear in mind that if you start escorting late in the tax year your profit in the first tax year will be low. So if you start in November you may earn less than the £5,595 before end of the tax year on 5 April. The following year with a full 12 months you might earn more than the limit.

Once registered you will need to complete a Self-Assessment Tax Return in the usual way. They are sent out in early April and you have until 31 October to fill it in and report your income to HMRC. You get an extra 3 months, to 31 January, if you opt to do your Tax Return on-line.

One other thing to bear in mind is that your tax position may be significantly different the year your course finishes. Let’s suppose you graduate in June and stop escorting, but you then start a full-time job in July. Anything you earn from escorting in the period from April to June will be aggregated with your employment income which will take you over the Personal Allowance. Don’t worry your employer won’t know anything about your other income, but you will need to complete a Tax Return and probably pay some tax.

All you need to do is use the code EARTHUK at the checkout and you will get a discount of 12%. Numbers are not really my thing, but as the usual price is £12.50 I am fairly sure you get a reduction of £1.50. But hurry!

For anyone who has not seen the TaxRelief Diary, it is a no-nonsense book-keeping diary specially produced for escorts.  It is now in its fifth year and has built up a modest but loyal following.

There are full details, including a preview of some of the pages, here TaxRelief Diary and you can buy it here

PS One or two people have reported that the Lulu site shows the prices in US dollars. If that happens just scroll down to the bottom of the page and next to the flag you should be able to change the country to UK.

I am employed by my limited company.  I pay myself a wage & pay PAYE on that.  My Company organises my Health Insurance, Gym Membership and funds my education as a benefit.

Also, if I decide to start a family, Maternity Pay is easier to manage for an employee than for a Self-Employed person.

Now I don’t know anything about this girl, other than what she has written on this thread, and it may be that she has taken professional advice or there’s more to it than she has revealed, but it strikes me that far from being clever this strategy is fraught with problems.

From the little we know it appears that she has a limited company which receives her income from a day job (which she describes as ‘clothed’ contracts) and her income from escorting (presumably ‘unclothed’ or ‘partially clothed’.) The company then pays her a wage (or salary) and also pays for her health insurance, gym membership and education.

So, why wouldn’t you want to do this?

1. Paying yourself a wage through a limited company is less tax efficient than being taxed as a self-employed person. That is because the self employed pay tax at 20% and NI at 9%, while employees pay tax at 20% and NI at 12%, with an extra 13.8% payable by the company. The company gets corporation tax relief on the payments it makes, which brings the effective rate down a bit. But overall the company wage route costs a total of 43.04% in tax and NI while the self-employed escort pays 29%. So on £10,000 of escorting income you would end up paying an extra £1,404 of tax & NI.
2. At first sight getting your own company to pay for gym membership and health insurance sounds tax efficient. A self-employed escort will not get tax relief for them but a company typically will. However they will be treated as taxable benefits in kind so the escort will be charged 20% tax on the cost of the benefit, while the company will be charged NI at 13.8%.
3. If the contract is in the name of the individual rather than the company (and for health insurance or education it typically will be) the cost is even higher because the individual is also hit for employees NI of 12%. That makes the whole exercise more expensive than being self-employed and simply paying for your personal expenses out of your taxed income.
4. Benefits in kind are reported to HMRC on the dreaded form P11d. This is not a regime you want to get into if it can possibly be avoided because there is a much higher likelihood of an inspection which gives HMRC the opportunity to rummage around in all the company’s books. P11d’s are easy to get wrong and there are inevitable penalties when you do.
5. That leads on to another issue. If your civilian job is straightforward why would you want to push a cash business, with all the inherent difficulties in proving your income, through the same business structure? A small clean company and a separate cash based self-employment are much less likely to attract an investigation than a mixed larger company. And if you do get investigated the mixed company is going to be much messier and more expensive to handle.
6. If the civilian work is for businesses (which actually seems likely in this case because she is getting paid by BACS) you might want to voluntarily register for VAT even if you are below the VAT threshold. That’s because a VAT registered business customer will not be concerned if you add VAT to your charges, but you will be better off because you can recover the VAT you suffer on your business expenses. However you really don’t want your escorting income to be caught by VAT because you would either have to increase your charges by 20% or sacrifice 16.67% of your escort receipts to the VATman. With your escorting in a self-employed business and your civilian work in a company, the two are entirely separate so you can register one for VAT without it affecting the other. Put both into a company and you must either register all or nothing.
7. Of course tax savings could be achieved using a limited company if income was drawn out as dividends rather than as wages – and although she doesn’t say so I suspect she may be doing this to some extent. That’s because dividends do not attract NI. So there is a potential saving of 9% to be had; but that needs to be weighed up against some other crucial factors.
8. Because contracts involving prostitution have no legal force it is doubtful whether an escort can legally divert her income into a limited company. The punters almost certainly think they are dealing with an individual rather than a company employee. If there is no mention of the company on an escort’s website, or in any of the emails or texts setting up their meeting, and she never says a word about it to him, then it’s pretty obvious he is doing business with her. When he pays her the cash, and she provides services to him, the income is hers. It is nonsense to pretend the income belongs to a company, and she cannot make an agreement with her company to change that because immoral contracts are illegal. Any attempt to say “this is the company’s income, I saw the client as agent for the company” risks HMRC responding that the arrangement has no legal validity and is a complete sham, the income belongs to  the escort and we want tax from her; if she has paid it all into a company that’s interesting but irrelevant.
9. An escort could form a company and advertise it to clients via her website and emails, but anyone with £1 to spare could go to the Companies House website and get the full name of the director. And if anyone other than the escort is a director or involved in the management or ownership of the company they are at risk of prosecution for control and gain from prostitution.
10. And then there’s the decision in R v Registrar of Companies, ex parte Attorney General which resulted in Lindi St Clair (Miss Whiplash) having the registration of her company quashed.

Our escort’s final comment that maternity pay is easier to deal with for an employee than for a self-employed person will astonish anyone who has had to handle the payroll for a business with employees getting SMP. OK it’s probably not as difficult as the process of child-birth but it ain’t straightforward. It is certainly true that employees get more maternity pay than the self-employed, but that is because they pay a lot more NI.

Conclusion

If you have an existing limited company and you start doing a bit of escorting what should you do? Well the first thing to do is to take careful professional advice, and make sure you give your advisor all the relevant facts. Generally the simplest and most straightforward approach will be best: your escorting is a new self-employed activity, and should be registered as such, rather put through your company.

UPDATE:

The lady concerned has quite reasonably commented “I am inclined to take advice from my Accountant and from HMRC, rather than a messageboard on these things.”

It certainly was not not my intention to give her advice, and to do so on the basis of a partial understanding of the facts would of course be very dangerous. My intention was to draw out some of the general principles that need to be considered by anyone contemplating doing escorting work through a limited company. My overall view remains that doing so is fraught with difficulties, not least the issues thrown up by the Lindi St Clair (Personal Services) Ltd case, which sadly few accountants seem to know about.

If my article comes over as presumptuous, I am very happy to apologise.

There are a number of reasons why you might want to describe your business in a way that does not explicitly state what you do. Two that come to mind immediately are applying for a mortgage or a tenancy. In both cases you would probably prefer to produce a set of accounts or tax return which is more discreet about your business. And of course if you ever plan to become Mayor of London it looks like you will now have to publish your tax records.

Strictly your business description should accurately describe what you do. You certainly cannot claim to be something that by no stretch of the imagination describes what you do: so that rules out dentist, tree surgeon, plumber and author. In practice HMRC are unlikely to object to something that loosely encompasses escorting. They are more concerned to get you registered and paying tax. Indeed at one time their guidance  advised tax inspectors to agree how income from prostitution should be described before they assessed it. That guidance may still be there but the relevant bit of the HMRC Enquiry Manual is not available to look at as it’s exempt from Freedom of Information. I cannot see any problem with any of the descriptions suggested above in the first paragraph.

One thing to watch is that if you register with a fairly broad description, like dancer or entertainer, you are likely to be asked to give more details. There are a lot of differences between the way in which ballet dancers are engaged and the type of expenses they incur, and the working habits of their pole dancing sisters. The easiest way to address this is to add some background information on your first tax return.

The second part of the question is whether the choice of business description limits the type of expenses you can claim for. For example if you tell HMRC you are a dancer does that mean you can claim for shoes and tights but not condoms or your website? The answer is that it does not matter what you call your business, it is the reality of how you earn your income that matters. The rule for expenses is that they are allowed if they are wholly and exclusively incurred in generating your business income. If the reality is that your income derives from bookings you get through your website, then the cost of your website is allowed. And similarly if your income is from escorting you don’t get tax relief for buying ballet shoes, no matter how your business is described.

One final thought. Suppose you have an existing business, say as a proof reader or a party planner, and you then start doing some escorting. Can you just treat your new activity as an extension of your existing business and put all the income and expenses through that? Strictly it is wrong, but as you will nearly always end up paying exactly the same amount of tax as if you had registered the two businesses separately it is not likely to get you into serious trouble. If HMRC find out you can justifiably say that no tax has been lost so there should be no penalties. Their main concern would be whether amalgamating two different businesses has disguised the fact that one is making profits and the other losses.

I hope you like the new cleaner layout which has been designed to make it easier to find your way around.  All the previous material has been revised and updated, and Jolyon has added some new stuff too.  We have tried to organise everything in a more logical way, but apparently tax is not always logical so we may not have succeeded.

One of the advantages of the new layout is that comments can be added. I am afraid comments will not appear immediately. We seem to get an enormous amount of spam – mostly from people claiming to be the world’s largest supplier of false passports – so I have turned on moderation which will delay things a bit.

I will try to kick Jolyon into giving timely and relevant replies to comments, but he tells me we can give generic, but not specific advice (whatever that means!) so if you have a detailed question you would do better to consult an accountant who can give advice tailored to your specific situation.

Enjoy!

Hattie Milliner

The cover design is slightly different this year, but the inside is unchanged. As before it is A5 size and coil bound so the pages fold flat making it easy to write in. The price is also unchanged at £12.50 plus postage & packing.

To take a peek at what’s inside there’s a preview with pictures of selected pages here.

Gladstone's 1860 budget box was used until retiring due to fragility in 2010

I watched George Osborne deliver his budget and wondered why the BBC hadn’t included the usual tame accountant in their team of expert post match commentators. There’s only so long I can stomach listening to Robert Peston sharing with us his ignorance of Corporation Tax. Then I discovered why. It took the HMRC website almost an hour to twig that the speech was over and publish the documents containing all the detail.

So here are the main tax changes that affect escorts.

• Class 2 NI – goes up from £2.50 to £2.65 per week from 6 April.
• Income tax Personal Allowance – goes up from £7,475 to £8,105 from 6 April. For someone paying tax at the basic rate of 20% this reduces their annual tax bill by £126. And for the self-employed this means a reduction in your 2012/13 tax bill which is payable on 31 January 2014. The chancellor made a big song and dance about increasing the personal allowance to £9,205, but that does not come into effect until the following year, 2013/14.
• Starting point for higher rate tax – comes down from £35,000 to £34,370. The reduction is designed to cancel out the increase in personal allowances and means that anyone with income over £42,475 (i.e. 7,475 + 35,000) will still pay 40% tax on the excess. The endlessly discussed 50% rate (which is being cut to 45% in a year’s time) only kicks in on incomes over £150,000.
• Blind Persons Allowance – it’s hard to believe there are many registered blind escorts, but if you’re one of them, your extra tax allowance is going up from £1,980 to £2,100 in April, which at 20% is worth an extra £24 a year in tax saved.
• Class 4 NIC – this is collected with your self-assessment tax, and the starting point is going up this April from £7,225 to £7,605. It is charged at 9% which means the annual saving is just £34.20. Again this will reduce the payment due on 31 January 2014.
• VAT registration limit – goes up from £73,000 to £77,000 with effect from 1 April.
• Alcohol & tobacco – going up by 2% above inflation, and 5% above inflation respectively.
• Petrol & diesel – will go up by 3p per litre, but not until 1 August 2012.

So, all in all, not a lot of excitement there. I’ve ignored all the stuff about Bingo tax, Landfill and Aggregate taxes, and the news that the total we can put into our pension schemes has been reduced from £1.8M to £1.5M – I wish! There are also some very confusing changes happening to personal allowances for anyone born before 1948, but I’m guessing that doesn’t affect a lot of working escorts.

We will get the changes edited into the other pages on the site as soon as we can.