Have you heard of Patreon? It's yet another piece in the the ever-evolving “alternative finance” puzzle that's taking the micro-business world by storm.

How does Patreon work?

Unlike one-and-done platforms like Kickstarter, Patreon takes more of an ongoing approach to finance. Instead of trying to hit a specific goal to fund a specific project, Patreon allows supporters of your work to contribute cash on a monthly basis, or for every piece of work you produce.

It's actually one of those “so old it's new” ideas, based on the concept of patronage. Essentially, artists from Mozart to Shakepseare were able to keep working because of regular payments from affluent aristocrats.

These days, thankfully, you don't need to be quite so lucky in your friends. Patreon's system means that even very small contributions from enough people can mount up to a pretty decent income. Of course, where there's income, there's Income Tax.

Do I need to pay tax on the money I make from Patreon?

Patreon does what it can to keep the tax situation simple for its users. You are going to need to do some paperwork to get set up, though.

Non-United States creators have to fill out a W-8BEN form, known formally as a  Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. It's a mouthful, but it basically just stops you getting hammered by the American taxation system as well as your own.

Depending on what you're actually doing for your patrons money, you might have some familiar worries about VAT MOSS hanging over you. Luckily, Patreon takes care of that for you. EU creators have their VAT collected by the system itself. They still recommend talking to a tax expert if you're unsure that everything's being done correctly – and obviously we agree there.

These recurring payments, even if they're quite small, can really start to mount up over time. Patreon's most successful creators are making £750,000 or more a year from the platform. There are bloggers, podcasters, musicians and any number of other artistic types making regular money through it.

How do I declare my Patreon income to HMRC for tax purposes?

However, as with all taxable income, you've got to be careful how you handle it. Even if you've already got a PAYE job, or are self-employed in another field, you've still got to account for your income. That means declaring your patrons' cash in a Self Assessment tax return each year, and keeping track of what you're spending to earn it.

That last point is one that a lot of people trip over. When you're running a business, there are a lot of unavoidable costs that eat into your income. HMRC only want to take their bite our of your actual profits, meaning those costs bring down the amount of tax you owe. Depending on what you do on Patreon, you might have any number of “allowable expenses” to track and report to the taxman. Examples include:

  • Patreon's 5% fee.
  • Currency conversion fees.
  • Hosting and domain charges for your website.
  • Any software or services you're using to manage your accounts or emails.
  • Certain types of insurance you've bought for your work computer or phone.
  • Certain courses you've taken to support your business or improve your output.

What's the simplest way to sort out paying tax on my Patreon?

If you're hoping to keep things as simple as possible, it's worth looking into using the “cash basis” to keep track of your accounts. Basically, using this system means you only count your money when it actually comes in, and your expenses when they go out.

The more traditional “accrual basis” has you recording income when you invoice for it, and your expenses when you “consume” them. For instance, if you buy some materials to make something, you wouldn't be able to record expense until you actually sold it.

How do I handle currency conversions for my Patrons?

Another thing to watch out for is currency conversion. You can't, for instance, just use Paypal's conversion rate to record your income. Paypal has its own rates and fees for transactions, which could mean you'd be under-reporting your income if you just went by their figures.

Only HMRC's own approved exchange rates count.

What happens when my Patreon becomes a business?

A lot of Patreon users find themselves quickly turning a hobby into a pretty decent little business. That's great – but it comes with responsibilities and dangers that many people just aren't prepared for. Running a business takes spotless bookkeeping, management skills and an understanding of cash flow. There are more hazards than just the taxman out there – but learning how to handle him is the first step to doing the whole thing right.

Talk to RIFT about where your Patreon business is going. Whatever you're creating, we'll steer you clear of the dangers and help you build the business you've been dreaming of.

RIFT is the UK's leading tax rebate and tax return experts.  A family run business in the tax industry since 1999.