It’s probably not a plot twist that you’re going to like. Quite simply, it doesn’t seem fair… But let’s take you through two prize scenarios.
In the first, you wander into your local newsagent and, on a whim, you buy a lottery ticket. You may forget about it and not check the numbers – whatever happened to the Saturday night lottery TV show anyway? But you check in the end – and there you are. A multi-millionaire winner…
In the second version, you’ve written a novel. It’s a culmination of your life’s work. Long, dark nights of the soul were emptied onto the page, and followed by what seemed to be thousands of revisions and edits as the manuscript came back, thick with red ink and Post-it notes. But, eventually, it’s published and in an effort to get some publicity for it, you enter it for some literary prizes. As an author of considerable talent, you win – the fame is fleeting, the glory is useful and the prize money, while small, is welcome.
Guess which one the tax man chases you for?
Yes, of course, the seemingly whimsical tax rules mean that if you win a literary prize for a competition which you actually entered, then the winnings from that are taxable. You can deduct entry fees, the travel expenses to the posh hotel for the award dinner as well as the price of the cheaper hotel round the corner that you actually stayed in. Maybe even the price of dry cleaning for your fancy outfit.
But you’re taxed on those winnings.
Quite why the tax man decides there should be such a difference between entering a prize given out on merit and entering a prize based on luck, such as the National Lottery, is something to be mused over, rather than challenged with HMRC. Pure luck isn’t taxable, in this case anyhow, but the rewards for talent are.
That doesn’t, however, include prizes which you, or your agent, didn’t put yourself forward for. Let’s aim high – the Booker Prize, for example, has entrants submitted by publishers, not by authors, agents or translators. On that basis, the winnings – which were £50,000 last time round – are not taxable. Quite what constitutes a knowing and an unknowing entry is a matter of nuance – we suspect publishers will tell an author if they are being submitted. But if that is technically the publisher’s choice and they are running the process, then the author is separate from that and the prize money would be tax-free.
Of course, it’s the professional pride that counts when you win the prizes – but the money helps. It also helps to know what is taxed and what is tax-deductible, but the bottom line seems to be, the more unlikely the winnings are, the less they are taxed.
If you want a considered view of your more tax obligations as an author, then just get in touch.
