Before your tax bill can be calculated you need to work out how much you’ve earned. So it’s time to look at what makes up your business income and what expenses you can take off to arrive at your business profit.
Income tax and NI are annual taxes. They are charged on what you have earned in each tax year. In principle you can prepare your accounts and work out your profit up to any convenient date each year but it’s usually easier, and a lot less confusing if your accounts year coincides with the tax year. Unfortunately the tax year ends on 5 April, which is plainly silly so HMRC are quite happy for you to do your accounts up to 31 March each year and pretend it’s the end of the tax year.
Put simply, your profit each year is your business income less your allowable business expenses. Or, more obtusely, your profit must be calculated so as to give a true and fair view in line with UK GAAP (UK Generally Accepted Accounting Practice) and the FRSSE (pronounced frizzy, and standing for the Financial Reporting Standard for Small Entities) unless they conflict with tax legislation.
If you want to know why the tax year starts on 6 April the answer is here. And if you feel the need to know all about UK GAAP and the FRSSE you might want to consider some kind of therapy or medication .
There’s not much difficulty in calculating an escort’s business income: it’s simply everything she receives, in the envelopes discreetly slipped to her, in exchange for her time and companionship (or whatever.)
If you work through a parlour the typical arrangement is that you receive the punter’s payment and then hand it all to the maid for safe-keeping. Then at the end of the shift you get back your share after the house percentage and the maid’s share have been deducted. Your income is the total amount initially paid to you by the punter, while the deductions for the house and the maid are allowable expenses. The end result is the same unless you are VAT registered – or you ought to be VAT registered.
Escorts working through an agency usually get the full fee from the punter and then account to the agency for their booking fee. Again the total fee paid by the client is your business income, and the agency payment is an allowable expense.
Cash tips should also be included in your business income.
Payments in kind are included in business income but small gifts of things like flowers, chocolates, underwear or perfume would not normally be taxable. But they must be gifts and not part of the agreed fee. So announcing on your website that your normal fee is £300 but you’ll give a freebie in return for cup final tickets is asking for trouble. And large and expensive gifts (cars, boats, expensive jewellery) could raise a few eyebrows at the tax office. If you routinely sell all the gifts receive in e-bay I can see HMRC arguing the proceeds are part of your business income.
But beware. I know of one dominatrix who has a section on her website inviting worshippers to ‘adopt’ her household bills: council tax, TV licence, student loan repayments etc, all of which are listed in detail with amounts and in some cases the ‘name’ of the person who has adopted the bill. Without a doubt, that is going to be taxable.
Of course there is no problem with receiving hospitality as part of a booking. So you won’t pay tax on the cost of a punter buying you dinner, taking you to the opera or flying you both to Lapland to visit Santa.
So, what business expenses will the Revenue let you take off your total income? The two rules, in tax-speak, are that you can claim for any expenses that are ‘wholly and exclusively for the purposes of the business’ and the expenses must be ‘revenue and not capital’ in nature. There are also some expenses, like business entertainment, which are specifically prohibited from being allowable.
The wholly and exclusively rule means that any expenses which have a mixed personal as well as a business purpose are not allowable. The classic example is clothing. Although you may say that you only ever wear business suits for work, the Revenue will argue that there is a mixed business and personal purpose because you also wear this clothing to keep warm and for reasons of personal decency.
But expenses don’t have to be necessary to the running of your business, or even commercially sensible, in order to be allowable. For example you might decide to spend £10,000 on professional photographs for your business website. It’s clearly not essential to your business that you invest so much, and it might be extremely bad value for money, but it’s also clearly wholly and exclusively for the purpose of your business, so it’s allowable.
The revenue and not capital rule means that you can’t get tax relief on the cost of acquiring an asset of continuing benefit to the business. That might include the cost of buying a car or having a blacksmith build dungeon equipment for you. There are separate rules which allow you to claim relief on capital expenditure. Of which more later.
Allowable expenses include ….
Here’s a list of expenses that will be allowable for tax. So you can subtract them from your income and only pay tax on what’s left. We’ll look at some special cases in a later article.
- Anything you buy and sell on to your clients. For example if you sell worn knickers to your clients then the cost of buying them is allowable. Obviously you also need to include the money you receive from your client as part of your income.
- Payments to your driver. You ought to make sure he recognises he is self employed and needs to tell HMRC about his income from you. A receipt from him would be nice, but if he doesn’t want to declare it you can hardly claim tax relief. And if your driver is your partner there’s no point in paying him if he’s already a tax payer – you’ll get the tax relief but he’ll have to pay about the same amount in extra tax.
- Rent for any flat or accommodation you pay for and use just for business.
- And if you use a flat just for business you can claim for any council tax, water rates and heating and lighting bills that you have to pay.
- If you work from home you can claim a proportion of your council tax, water rates and utility bills.
- Agency fees
- Photography for advertising
- Web-site maintenance
- Telephone – the business proportion
- Internet charges
- Bank charges if they’re for a bank account you only use for business
- Travel expenses for business journeys – e.g. train fares, taxis, car parking. Of course you must have paid for them. You can’t claim for an airline ticket if the client paid for it.
- Subsistence. If you are working away from home and have to stay overnight then you can claim for the reasonable cost of hotels and subsistence including lunches. You do of course have to actually pay for the cost before you can claim tax relief – you can’t claim for an evening meal if your client paid for it. If you are not staying away from home overnight you can still claim for modest lunch expenses if you habitually travel on business or make occasional business trips.
- Protective clothing – unless you get them free from the GUM clinic!
- Uniforms. Clothing is a bit of a minefield because the Revenue take the view that most clothing isn’t bought ‘wholly and exclusively’ for the business but also for the personal benefits of warmth and modesty. Protective clothing is fine, so you can claim for the steel toe-capped boots and the boiler suit. But there’s a problem with everyday clothes even if they’re clothes you wouldn’t otherwise choose to wear – there is a legal case (Mallalieu v Drummond) where the House of Lords threw out a claim by a female barrister who said she only bought black clothing for work because, being blonde, black didn’t suit her. So my advice would be to claim for uniforms (the pvc nun’s habit and the traffic warden’s rubber tunic) but not dresses and clothing that you might wear outside work. Lingerie that you don’t wear outside work probably cannot be said to provide you with much warmth or modesty, so should be claimable, but I would recommend having separate work and private lingerie. And if you are a barrister, as well as an escort, you can claim for a barrister’s wig and gown. If you want to know more we’ve added a recent blog post can I get tax relief on clothes used for work? which goes into a bit more detail and summarises what clothing is allowable and what isn’t.
- Similarly the cost of entertaining is not normally allowable. However if part of the package you are selling to your clients includes entertaining him then the cost would be allowable. So if you advertise that as part of your service you will cook him a three course lunch while dressed only in stockings, suspenders and high heels then the cost of providing his lunch would be an allowable expense. But if as part of an evening date you buy a round of drinks that would not be allowable.
- Make-up etc is likely to get caught by the wholly and exclusively rule. The best plan is probably to have a separate bag of work make-up.
- Toys could also fall foul of the wholly and exclusively rule. My careful observations stronly suggest there is a personal benefit to using vibrators, but the concensus of informed opinion on accountingweb.co.uk is that provided you have a separate set of work toys they would be claimable.
- And last, but by no means least: accountancy fees are allowable.
Expenses which are not allowable
And now a list of things you might think should be allowable, but aren’t. Among the expenses you cannot claim for are:
- Payment of wages to yourself.
- Your £2.50 a week NI contributions.
- Payments in response to threats, blackmail or extortion.
- Membership fees for the gym. It may be important to your business that you keep fit but the Revenue take the view that it’s not wholly and exclusively for the business.
- Similarly you can’t claim for hairdressing, manicures, colonic irrigation or plastic surgery.
- Health insurance, accident insurance, income protection insurance or life insurance.
- Childcare and baby-sitters.
Cosmetic surgery – is it allowable?
Almost certainly you won’t get tax relief on cosmetic surgery, but the HMRC Business Income Manual does hold out the possibility of of it being allowed if you can demonstrate that the surgery does not have a private purpose. What the Manual giving advice to tax inspectors actually says is:
Where a person in the public eye claims a deduction for the cost of cosmetic surgery to correct some perceived inadequacy in their appearance then you need to examine whether one of the purposes in incurring those costs was to gratify their private wish to improve/change their appearance. If it was, no deduction will be due. Only in exceptional circumstances will an operation to change personal appearance by reversing or masking the advancing of the years not have a private purpose. You should invite the Commissioners to infer the existence of a private motive unless there is compelling evidence to the contrary.
In most cases cosmetic surgery will at the very least boost self-esteem and may improve your private life. Breast augmentation, face lifts or tummy tucks are all going to have at least some element of private purpose and are not going to qualify tax relief. But what about Lindi St Clair’s utterly inspired question to the tax inspector who was sent to interrogate her? Could she get tax relief on the cost of having her tonsils removed so as to improve her technique at giving oral sex? It’s hard to see much personal benefit, and provided there was no medical reason for a tonsillectomy, I’d say there’s a good case for saying yes. Sadly Lindi’s biography doesn’t record what answer, if any, she was given at the time.
Cars & motorbikes
If you use your own car for business travel there are two methods you can use to calculate how much you can claim.
The first thing to say about business mileage is that if you run your business from home, even if you never do in-calls, then travel from home to a client meeting qualifies as a business journey, but if you are based in a parlour then travel from home to work is a private journey.
If your business turnover (total income before taking off any expenses) is more than the VAT threshold (£77,000 from 1 April 2012) then you will have to use the strict method.
The strict method
This involves a lot of careful book-keeping and calculation. You need to keep a record of all your business journeys and your total business plus private mileage each year to enable you to calculate the business proportion. Then you add up all the expenditure on running your car including petrol, insurance, servicing and car tax. You can claim as a business expense the business proportion of all these expenses.
On top of that you can claim capital allowances on the cost of the car, but what you can claim depends on the car’s CO2 emmissions. With a very dirty car (over 160g/km) in year one you can claim 8% of the original cost, then in year two 8% of what’s left, and so on in future years. For cars between 110g/km and 160g/km the rate is 18%. And for a very clean car (below 110g/km) you can claim 100% in year one. To make it more complicated the rates keep changing – for 2011/12 they were 10%, 20% and 100%. Having worked out the allowance you then only get tax relief on the business proportion.
When you come to sell the car you have to compare what you get for it with what its cost has been reduced to. If you get less than the amount it’s written down to then you get a further balancing allowance, but if you get more then you get charged tax on the excess.
By now you’re probably hoping there’s an easier method, and there is.
The easy method
The simple method is to keep a record of business journeys and claim using the Revenue approved rate per mile which is 45p for the first 10,000 business miles per year. If you do more business miles than that you can claim 25p for each mile over 10,000.
If you use a motorbike for business journeys you can claim 24p per mile, or a very generous 20p if you use a pedal cycle. There is no mileage allowance for walking or travelling to an appointment on the back of a camel. And doctors do not advise male escorts to cycle to assignations.
Capital allowances are designed to give tax relief on capital expenditure and here we’re talking about the cost of plant, equipment and assets of continuing use to you business. That’s likely to include such things as dungeon equipment, your work computer, and if you have a flat which you use exclusively for business it will include the furniture.
What follows is an extremely simplified account of what is a very complex and fiddly area, so if you’re buying, or indeed selling, a lot of capital equipment, and particularly if you are making alterations to a building, it’s well worth getting professional advice to ensure you get all the tax allowances you’re entitled to.
Fortunately most escorts don’t buy lots of equipment, and the rules are straightforward.
For the 2012/13 tax year you get immediate tax relief on up to £25,000 of capital expenditure. For 2011/12 the limit was £100,000. Any expenditure in excess of those limits will be eligible for tax relief spread over a number of years.
If there is any private use then the capital allowance is restricted. So, for example if only 80% of your computer use is business related you will only get 80% of the allowances.
For example, if you pay a carpenter £5,000 to build you a luxury set of finest mahogany stocks and a leather lined dog kennel, and he delivers them after 6 April 2012 then you can claim the full cost by reducing your 2012/13 profit by £5,000. That’s because £5,000 is comfortably within the £25,000 limit.