VAT VAT revisited


 

 

Since the Chancellor of the Exchequer doubled the VAT rate to fifteen percent, many artists, administrators and gallery proprietors have raised queries about the tax. Most problems have arisen through a lack of knowledge or from a misunderstanding of the nature and operation of the tax; all enquiries were serious and urgent. It has become clear to most people that to get your VAT law wrong can cost you a lot of money – in fact double what it might have cost a couple of months ago.

A look at some of these problems and at possible solutions may help others to avoid difficulties in the future.

1. When should galleries charge VAT on sales?

Only in two situations:

  1. when re-selling work the gallery has bought in, but only if the gallery is registered for VAT.
    e.g. gallery buys work from artist/other dealer/collector for £100 and re-sells for £500 + £60 VAT (15% on the £400 profit) in this case the gallery owns the work and is re-selling for a profit; the gallery also has an annual turnover of £10,000 + and is therefore registered for VAT.
  2. when selling an artist’s work for the artist on a commission basis, but only if the artist is registered for VAT.
    e.g. where the artist is registered for VAT and the gallery is registered too: the gallery exhibits or stocks the work for the artist on consignment (i.e. on sale or return) and sells as the artist’s agent for £500 + £75 VAT (15% on the sale price) on a 50% commission basis + £37.50 VAT;
    the gallery takes £287.50 = £250 (50% commission on the sale) + £37.50 VAT (15% on the commission for providing services as artist’s selling agent);
    the artist gets £287.50 = £212.50 (sale price less agent’s commission + VAT) + £75 VAT (which must be passed on to the customs and excise); net result:

    • gallery keeps £250
    • artist keeps £212.50
    • customs & excise are sent £115.50 = £75 sent by the artist + £37.50 sent by the gallery
    • purchaser has paid £575

In this case the artist owns and sells the work through the agency of the gallery. The artist has an annual turnover of over £10,000, and is therefore registered for VAT and must charge VAT on his sale. The fact that the gallery is also registered for VAT is not the reason for charging VAT on the sale – it’s the reason for charging the artist £37.50 VAT on the commission of £250.
e.g. where the artist is registered for VAT but the gallery is not registered:
the gallery exhibits or stocks the work for the artist on consignment (i.e. on sale or return) and sells as the artist’s agent for £500 + £75 VAT (15% on the sale price) on a 50% commission basis (no VAT)
gallery takes £250 (50% commission on the sale) – no VAT
artist gets £325 = £250 (50% on the sale price) + £75 VAT (15% on the sale price) net result:

  • gallery keeps £250
  • artist keeps £250
  • customs & excise are sent £75 VAT by the artist
  • purchaser has paid £575

In this case the artist owns and sells the work through the agency of the gallery. The artist has an annual turnover of £10,000 +, is therefore registered for VAT and must charge VAT on his sale. The fact that the gallery is not registered for VAT means that it must not charge VAT on its commission.

2. When should galleries not charge VAT on sales?

A gallery should never charge on sales in these situations:

  1. when re-selling work the gallery has bought in, and the gallery is not registered for VAT.
    e.g. the gallery buys work from artist/other dealer/collector for £100 and re-sells for £500 (no VAT).
    In this case the gallery owns the work and is re-selling for a profit of £400. The gallery’s annual turnover is less than £10,000, is therefore not registered for VAT and so must not charge VAT.
  2. when selling an artist’s work for the artist on a commission basis, and the artist is not registered for VAT.
    e.g. where the artist is not registered for VAT and the gallery is not registered for VAT: gallery exhibits or stocks the work for the artist on consignment (i.e. on sale or return) and sells as the artist’s agent for £500 (no VAT) on a 50% commission basis (no VA T)

    • gallery takes £250 (50% commission on the sale)
    • artist gets £250
    • purchaser has paid £500

In this case the artist owns and sells the work through the agency of the gallery, which is paid 50% commission for supplying the selling service. Neither the artist nor the gallery has an annual turnover of £10,000 and so neither is registered for VAT and neither must charge it – the artist on the sale nor the gallery on its commission.

Where the artist is not registered for VAT, but the gallery is registered for VAT.
The gallery exhibits or stocks work for the artist on consignment (i.e. on sale or return) and sells as the artist’s agent for £500 (no VA T) on a 50% commission basis + £37.50 VAT. The gallery takes £287.50 = £250 (50% commission on the sale) + £37.50 VAT (15% on the commission for providing services as artist’s selling agent).
Artist gets £212.50 (sale price less agent’s commission + VAT) net result:

  • gallery keeps £250
  • artist keeps £212.50
  • customs & excise are sent £37.50 by the gallery
  • purchaser has paid £500

In this case the artist owns and sells the work through the agency of the gallery which has an annual turnover of £10,000+, is registered for VAT and must charge VAT, but only on its commission. The artist does not have a turnover of £10,000+, is not registered for VAT, and therefore must not charge VAT on his sale.

3. What happens if the gallery gets it wrong?

This last example is the most common cause for complaint. Many galleries charge VAT on all sales (because they themselves are registered for VAT) but without questioning whether the artist is registered for VAT – and this is the crucial question, when selling for the artist on a commission basis.
With VAT running at 15’% these are serious facts to get wrong; e.g. the gallery is registered for VAT and the artist is not registered. The gallery exhibits or stocks work for the artist on consignment (i.e. on sale or return) and sells as the artist’s agent for £500 + WRONGLY CHARGED £75 VAT, on a 50% commission basis + correctly charged £37.50 VAT (15% on the commission).

The gallery WRONGLY takes £362.50 = £250 (50% commission on the sale) + correctly charged £37.50 VAT (15% on the commission) + WRONGLY CHARGED £75 VAT (15% of the sale price); artist gets £212.50 (sale price less agent’s commission + VAT on commission) net result:

  • gallery gets £325
  • artist gets £212.50
  • customs & excise are sent £37.50 by the gallery
  • BUT purchaser has paid £575

SO where is the £75 VAT which the gallery should have given to the artist, who in turn should have passed it on to the customs & excise? Perhaps it’s in the gallery’s bank account.

Some galleries do in fact send the wrongly charged VAT to the customs and excise, in the mistaken belief that it has been correctly levied – and the money is rarely returned. This is astounding; it means that throughout this country purchasers are wrongly paying 15% over the top, which is either

  1. wrongly going into the galleries’ pockets; or
  2. wrongly going to the customs & excise (who may or may not have pockets) and
  3. is not going to the artist and
  4. is unnecessarily increasing the price of art works to a level which is unacceptable to many buyers and would-be purchasers (an extra £75 can get you to New York).

The answer to the problem is documentation: if galleries say they have charged VAT – whether on sales and/or on commission – they must, by law, issue a receipt with their VAT registration number endorsed upon it. (Indeed so must any VAT-registered person – including an artist). So, if a gallery states that it has charged VAT somewhere along the line and an artist knows s/he’s not registered for VAT, then the VAT can only be payable on the gallery’s commission and not on the sale price. In such a case the gallery should issue the artist with a receipt showing the commission charge and the VAT paid.

4. Artists who are not registered must be at an unfair advantage/since they can sell for much less?

Yes and no. Yes: because they can sell for £500 without charging VAT, thereby ‘undercutting’ a VAT registered colleague by £75 (in the purchaser’s eyes). No: because, unlike VAT registered colleagues they cannot claim back from the customs & excise VAT they have paid on purchase of materials and services.

5. Does this mean that VAT-registered artists are at an unfair advantage, since they can get VAT relief on purchase of materials and services?

On balance, yes, because although registered artists must charge VAT on sales, their registration enables them to claim back vast sums of VAT spent on materials and services.
e.g. artist registered for VAT sells goods and services amounting to £15,000 + £3,000 VAT, per annum.
S/he has purchased materials and services amounting to £10,000 + £1,500 VAT, per annum.
At the end of the year the artist deducts the £1,500 he spent on VAT from the £3,000 VAT s/he has charged on sales, and sends the £1.500 balance to the customs and excise.

In this way, a VAT-registered artist never pays VAT on materials and services. The unregistered artist always pays VAT on materials and services. If you’re still with me – first of all, congratulations, and secondly, this sounds like “one law for the rich.”, since only well-heeled artists have a turnover high enough to enable them to register. However, it is possible for artists whose turnover is less than £10,000 to voluntarily register for VAT, if they feel they are at an unfair disadvantage compared with their registered colleagues.

6. What would happen if sales were zero-rated?

VAT registered artists (those turning over £10,000 + per annum – or voluntarily registered) would be even better off.

e.g. A VAT registered artist sells goods and services amounting to £15,000 + NO VAT (zero-rated).
S/he has purchased materials and services amounting to £10,000 + £1,500 VAT (15% on materials and services).
At the end of the year the artist is entitled to deduct the £1,500 VAT s/he has paid out from any VAT recovered; i.e. the artist is £1,500 out of pocket.

The customs & excise would therefore have to pay the artist £1,500 to cover the VAT s/he paid out on materials and services.

The unregistered artist would still pay VAT on materials and services; but the registered artist would not. However, the registered artist would no longer have to charge VAT on sales and so would be in an even better position than the unregistered artist if sales were zero-rated. It follows, therefore, that if zero-rating of sales did occur, then it would be in all artists’ interests to voluntarily register for VAT.

7. Would the best answer be to zero-rate sales and materials and services?

Yes: then VAT registration would, in effect, achieve total VAT relief for bona fide professional artists.

Another solution (which would amount to the same thing) would be to exempt all bona fide professional artists from the VAT scheme – as they do in certain European countries on the basis that ‘the professions’ should not be required to levy a ‘commercial’ tax for providing their services. However, this would not be very attractive to legislators and would not require any method of registration.

Epilogue

VAT in the visual arts (as in other cultural fields) is in need of serious review and reform. Its application to the arts is totally counter productive and should be abolished:

  1. it raises the cost of purchasing work to a level which is becoming unacceptable to many buyers, thereby contributing to a diminution of the market.
  2. the costs of making art are pushed prohibitively higher, thereby preventing many artists and organisations from making art happen.
  3. the administrative costs of knowing, understanding and playing the VAT system to the best advantage are prohibitive thereby nurturing dangerous (but often honest) mistakes resulting in great losses to artists, some organisations and arts administrators, and in cheating the buying public.
  4. VAT has no real application to the arts or professions; it was intended to replace ‘purchase’ tax as a ‘commercial’ levy – never was it intended to kill stone dead the buying of art.

In a state where support for the arts has for many years taken the form almost entirely of state subsidy, the abolition of, exempting from, or even zero-rating of, VAT in the cultural field would be a law reform which would go a long way to ameliorate the present cut backs in public expenditure which have scythed public support for the arts.

(For further information on the qualifications for VAT registration and a general appraisal of the subject see Art Monthly No. 24)

© Henry Lydiate 1979

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