“A Court of Appeal ruling that the Bournemouth Symphony Orchestra (BSO), a registered charity, does not qualify to treat admission income as VAT exempt will hit museums, theatres, orchestras and zoos across the UK” stated Deloitte, a leading professional services firm, which advised the BSO in this case. The orchestra’s appeal was overturned because Michael Henson, Managing Director at the BSO also sat on the Board of Trustees making it not “essentially voluntary” and breaching one of the conditions for exemption. It is reported that the BSO will lose around £50,000 a year and will not be able to reclaim over £150,000 in tax it had previously paid.
In 2002 the European court overruled the UK by allowing London Zoo’s ticket money to be VAT exempt. This meant many charities could reclaim VAT backdated to June 1993. Yet, in December 2003 a further policy was issued stating that having a paid executive on the board would mean the exemption could not apply.
Martin Graham who is a founding trustee of the Longborough Festival Opera(LFO), a small Gloucestershire-based musical charity that recently emerged triumphant after a 3-year battle with the taxman over their VAT exemption status, believes that something “sinister” is going on and that arts charities are being targeted by Her Majesty’s Revenue & Customs (HMRC) for their turnover. “Had they been successful in destroying LFO they would have moved against many other much larger Arts organisations…I earnestly hope that HMRC abandon their fiendish campaign against Arts Charities large and small” he said.
However, the tax experts are not so sure. “The fault is not HMRC’s,” says Peter Jenkins, Technical Adviser to the Charities Tax Reform Group (CTRG), “the criteria are set out in the Sixth Directive, and inevitably disputes have arisen over the exact interpretation of these complex provisions.” There is no mistaking the VAT cultural exemption law is a complex one which can result in inconsistent application by the inspectors. Graham Elliott, partner at accountant firm haysmacintyre says, “It is a well-known fact that different tax payers are treated differently depending on the nature of the inspector. Those arts charities which have an agreement with which they are happy are simply keeping a low profile on the matter, just as they should.”
However, it isn’t only the UK arts charities that are affected. The CTRG estimates “irrecoverable VAT costs charities between £400 and £500 million a year.” Even Terry Wogan’s TOGS for Children in Need are urging us to not only put our hands in our pockets this year but to also put pen to paper and lobby Parliament in a bid to stop over £75,000 going to the Treasury. “We are not asking the government to give us anything, we are just asking that they don’t take anything away,” they state in a suggested letter to MPs.
Surely, if so many charities are suffering under the current VAT laws, struggling to find the necessary time, money and resource to manage compliance issues, and if the area is too intricate and complex for the inspectors to apply consistently it must be time for a change? So, why doesn’t the government simply allow all charities to be free of VAT?
“Not all charities are better off being exempt.” Graham Elliot points out. “An appreciable number would rather be taxable so they can reclaim all VAT on costs. That would be a bigger figure in certain cases than the VAT ‘lost’ on admission charges.” Yet, the tax law as it stands means that charities meeting the exemption criteria cannot choose to be taxable “but must be exempt, with all the disadvantages that might present.” This is an important point to note, presenting a possible downside to organisations winning on cases such as BSO.
Most tax experts appear to support the Court of Appeal’s decisions regarding the LFO and BSO outcomes, believing that the rulings had been consistent with past case law, whereas Deloitte believe “Customs will only allow exemption on the narrowest basis possible.” Kevin Cresswell, an indirect tax partner at Deloitte said, “…many charities were hoping this case would create certainty on when VAT exemption should apply. Rather it has created further confusion.”
This is still a hot and sticky topic, and one that the BSO could take all the way to the House of Lords. Whatever the outcome, they remain positive of their own position. “The loss of this case has no financial impact on the bottom line of the company. The orchestra is currently in robust financial health and continues to plan many exciting artistic initiatives with audiences continuing to grow and attendances the envy of most of the orchestral sector in this country.”
And what does this mean for the future of other UK arts charities? Nobody really seems to know or to agree – but if grey is the new black then the VAT debate is definitely back in fashion.
