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Sean Egan highlights the issues that arts organisations should consider before applying to be treated as VAT exempt.

You may well have seen the reports of the Brontë Society receiving a cheque for £596,000 for VAT going back to 1990. You are probably also aware that the rules that enabled this windfall apply to cultural organisations that charge for admission and are not profit distributing. This will include many theatres, venues, galleries and museums. Naturally the vanguard of the rebate claimants have been zoos and museums who are reportedly seeking rebates of £40m.

The scope for such a windfall is now fairly clear for not-for-profit organisations whose decisions are made by unpaid trustees, following the resolution of the London Zoo case in the European Court last year. This has removed many of the objections that Customs & Excise were seeking to raise to prevent a wide application of the Cultural Services Directive that was implemented into UK law in 1996.

The position for organisations whose main activity is admission charges such as the Brontë Society, which operates the Brontë Parsonage Museum, is relatively straightforward. It would rather not have to charge VAT on admission prices and is prepared not to be able to recover VAT on expenditure.

Before everyone who thinks they may qualify beats a path to Customs? door there are a few important issues to consider:
1. The exact position is not yet clear. Customs have said they will issue guidance as to how they will implement the directive following the London Zoo case. At present they have given reassurance that organisations applying will not be penalised if it turns out that there has been an underpayment of past VAT. Only once the guidance is issued and becomes binding can organisations plan with any certainty for the future and be more confident about the likelihood of a rebate of past payments.

2.Though you may have no choice once the guidance is issued to become VAT exempt, that is not sufficient reason for going ahead and applying for a rebate. It is worth assessing now whether there is a likelihood of achieving a rebate by being treated as VAT exempt. If that is the case then you need to look at whether becoming VAT exempt will adversely affect the future operation of the organisation. For instance if there are major refurbishments or a capital project in the offing you may well be a loser if exempt.

3. There are a variety of different techniques that can be used to ensure that any VAT exemption does not lead a net loss to the organisation. Activities may be channelled through a trading subsidiary, you may look at altering your constitution, and so on. The nature of these techniques and how effective they are likely to be will depend on the specific circumstances of your organisation, its VAT activities and how it is structured and operated.

It is quite likely that Customs will seek to minimise the impact of the directive to ensure that Gordon Brown?s coffers are maintained. But even so arts organisations should seriously look at whether rebates can be achieved and whether their future operation is likely to benefit or lose from any VAT exemption. When it comes, the Customs guidance is likely to be immediately applicable and so it may then be more difficult to rearrange your activities or take other steps to minimise any other impact.



Sean Egan is Head of the Arts & Media Department at Bates, Wells & Braithwaite, Solicitors e: s.egan@bateswells.co.uk

Need advice? Send your legal questions to editors@artsprofessional.co.uk
and we will ask Sean to respond through this column