There has been much controversy surrounding the recent VAT case involving London Zoo and HM Customs and Excise (C&E)1 and the decision could have a significant financial impact for a large number of arts organisations in the funded sector. Samantha Samra and David Scott explain why.

Certain activities in the public interest can be exempt from VAT. These include admission charges to a museum, gallery, zoo or a theatrical, musical or choreographic performance. For the exemption to apply where a non-governmental body supplies the cultural services, the body must be ?managed and administered on an essentially voluntary basis by persons who have no direct or indirect interest, either themselves or through intermediaries in the results of the activities concerned?.

The exemption is not optional. Consequently, organisations that qualify for this exemption cannot charge VAT on admission fees.

The Case

London Zoo is governed by a Council, and a Management Board and Committee appointed by the Council. None of its members receive remuneration. The Zoo employs around 400 paid staff, including a Director General, Director of Finance and Director of Personnel. The Zoo previously charged VAT at the standard rate on admission charges received by it, on the basis that it was managed and administered by some of its paid employees and was not, therefore, managed and administered on a voluntary basis by persons who had no direct or indirect interest in its activities.

The UK court held that admission to the Zoo would not be exempt from VAT. This was because the phrase "on an essentially voluntary basis" meant that substantially all the management and the administration of the body in question must be conducted by unpaid staff.

The case was referred to the European Court of Justice (ECJ), which held that for admission to the Zoo to be exempt from VAT, the persons participating in the management and administration of the Zoo must have no financial interest in their results2. In determining the persons to which this provision applied, it would be necessary to identify the key members of management and to ascertain their tasks. The provision was aimed at those making policy decisions rather than the implementation of such decisions. Therefore, those carrying out purely executary tasks were not included. Only the members of the body who took decisions of ?last resort? regarding policy, especially in relation to financial matters, were included. The ECJ held that the term ?on an essentially voluntary basis? was for the national authorities to determine by making an overall assessment of the facts.

Practical consequences

The importance of this case means that in applying the test of whether an organisation is ?managed on a voluntary basis?, the following criteria must be met:
? members of the management/directing body must be unpaid;
? the persons making decisions of last resort as to the policy, especially financial, of the organisation must be unpaid; and
? small remuneration payments to members of the directing body may exceptionally be permissible.

This suggests that the majority of organisations providing cultural services that do not have paid members of staff on their governing body will qualify for the VAT exemption. This is provided that there is no scope for suggesting that senior management is able to take decisions of "last resort" as to the policy of the organisation. As a result, many more bodies may be covered by the exemption than had previously been thought. Therefore, admission fees to many cultural events may be exempt from VAT.

Organisations may be entitled to reclaim VAT from C&E or more worryingly be obliged to make repayments of VAT previously reclaimed from C&E. Such reclaims and repayments could relate to VAT that dates back as far as 1996. An organisation may be able to reclaim VAT where it has previously accounted for VAT on admission charges to C&E where the admission was, in light of the London Zoo decision, actually an exempt supply rather than a taxable supply.

However, C&E may oblige an organisation to repay VAT that it previously reclaimed from C&E. This may be significant where, for example, an organisation has undertaken a capital project and reclaimed VAT incurred in respect of that project (in respect of construction costs etc.). This is because VAT charged to the organisation can only be reclaimed if it relates to a supply made by the organisation that is taxable for VAT purposes. Following the London Zoo decision, if admission to the cultural event should have been treated as an exempt supply rather than a taxable supply, VAT previously recovered may be required to be repaid to C&E.

This decision also creates a situation whereby some organisations may have a competitive edge over others when it comes to pricing if they do not have to account for VAT on admission charges.

An organisation may be able to bring itself within the exemption (or take it outside its remit) by undertaking some basic planning. This planning might involve:
? Giving paid members of staff a more significant role in decisions of ?last resort? and including them on the governing body, or, conversely, by stating clearly in employment contracts that they do not have such a role.
? By separating the different activities of the organisations and putting cultural services activities in a subsidiary, or conversely, by using a subsidiary for non-cultural services activities.


Samantha Samra is a solicitor in the Theatre and Charities Groups, and David Scott is a solicitor in the Tax Group at Harbottle & Lewis
e: samantha.samra@harbottle.com and david.scott@harbottle.com
1 Commissioners of Customs and Excise v Zoological Society of London: C-267/00 [2002] STC 521
2 The ECJ?s decision in this case was handed down on 21 March 2002. The High Court implementation of the ECJ decision is still awaited, but is expected soon