June 1 will be a key date for all voluntary organisations working in the arts. Sean Egan explains why.
In December 2003, Customs & Excise issued a Business Brief 1 clarifying its position following the recent London Zoo VAT case. The Brief holds few surprises for organisations that have made or are contemplating making a claim for a refund of past VAT payments; but the policy will be applied from June 1, 2004, and affected organisations should determine what action is required before then.
Organisations affected by the Business Brief
From that date, VAT exemption will apply to the cost of admission to museums, galleries, art exhibitions, zoos, and theatrical, musical or choreographic performances of a cultural nature supplied by all ?eligible bodies?. These are organisations that:
- are precluded from and do not distribute profits
- apply any profits from admissions to improving the facilities offered in return for admissions
- are managed on a voluntary basis by persons with no financial interest in the activities.
The London Zoo case ruled that the last condition is satisfied provided ?decisions of last resort? were made by volunteers; paid staff could carry out day-to-day management and administration.
Key points
Customs & Excise has now issued a revised VAT notice2 which clarifies a number of key points:
- It will be mandatory for eligible bodies to operate the VAT exemption on admission fees from June 1, 2004, and thus cease to recover VAT on costs.
- Organisations that have historically satisfied the criteria for exemption and which have overpaid VAT can claim repayments for the last three years ? in some circumstances longer.
- VAT costs on major building projects incurred up to May 31, 2007 may be recovered if the work is in progress at June 1, 2004.
- No retrospective adverse adjustments need be made under the capital goods scheme for completed projects.
Eligible bodies that are affected by the VAT exemption should urgently consider the impact that not charging VAT, yet not recovering VAT on their associated costs, will have on their finances.
Action points
1) You need to determine whether the VAT exemption will affect you and how; and not assume that only venues are affected. It is quite possible that touring companies who receive a share of box office will be treated as VAT exempt and as a result VAT recovery may be limited.
2) If you are affected you need to put in place, by June 2004, arrangements for correctly filing VAT returns applying the exemption.
3) If you are affected adversely you may wish to consider restructuring your organisation so that the effect of the exemption is removed or reduced.
4) If you are completing or contemplating a building project you need to establish how you are affected. Given the restrictive application of transitional relief this may have a significant impact on the project?s structuring.
A number of organisations have looked at paying board members or appointing employees to the board as a means of avoiding the exemption. For charities this should not be seen as a solution as one of the fundamental principles of charity law is that trustees (i.e. those on the governing body) should not profit from their post.
It is unlikely that you will know that your organisation has a VAT ?problem? until well after June 1. The most likely trigger will be if you make a claim for significant VAT recovery. Customs & Excise may then look at the organisation and whether part or all of the recovery can be disallowed. This will be particularly painful for organisations expending large amounts over a short period ? such as on capital projects and equipment purchase ? where 100% VAT recovery may have been factored into budgets and will have to be funded by cuts elsewhere. As part of the process Customs & Excise may well look at past VAT returns going back until June 1, 2004. As a result considerable amounts of VAT may be due in addition to future VAT being irrecoverable. This may seem bleak and at odds with the current approach to repayments for past VAT. However those repayments arose from Customs & Excise incorrectly interpreting EC law and being too embarrassed to recover VAT retrospectively. This Business Brief is different in that organisations are being put on notice and as a result cannot expect any flexibility of approach when in the future Customs & Excise consider a repayment to them is due.
Sean Egan is Head of the Arts & Media Department at Bates, Wells & Braithwaite, Solicitors; t: s.egan@bateswells.co.uk.
1 Business Brief numbered 28/2003
2 VAT notice, 701/47 ? Culture can be printed from the Customs & Excise website at www.hmce.gov.uk, or see www.artsprofessional.co.uk