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• Avoiding Culture Shock From VAT!

Introduction

West Country cultural organisations, such as art galleries and theatres, are being advised to review urgently the way in which they operate after a recent High Court decision that clarifies when VAT is payable on admission prices.

The warning comes from charity law specialist Geoffrey Trobridge at regional law firm Ashfords.

"The exemption from VAT helps to keep ticket prices down for many art galleries and theatres but, if the organisation is not set up properly, it risks a challenge by HM Customs and Excise that could cost them thousands of pounds in back tax," he said.

The recent High Court case resulted from an appeal by Longborough Festival Opera against a VAT tribunal ruling that it was not entitled to exemption from VAT on its ticket prices.

The price of admission to a museum, art gallery, zoo or theatre is normally exempt from VAT but only if it is run by a public body or 'an eligible' body.

"It is really a question of the definition of an 'eligible body', the terms of an organisation's constitution and the way in which it is run in practice, plus how its profits are used," said Mr Trobridge.

"It was always clear that if a cultural organisation wanted to claim the VAT exemption then it could not distribute its profits through dividends on shares, but the High Court has now ruled that excessive salaries or favourable contracts could also amount to a distribution of profits".

"As a result, any profits must be applied to the improvement of the services or facilities, and the management and administration of the organisation must be undertaken on a voluntary and unpaid basis.

"In addition, trustees or directors must have no financial interest in any profits that result from the organisation's activities."

Mr Trobridge also said that the High Court had adopted a very purposeful interpretation of the legislation in order to differentiate between organisations run for the profit of those who own and control them, which are not entitled to the exemption, and those that use any profit solely for the purposes of the organisation itself.

"It is vital to satisfy the conditions set out in the legislation to qualify for the exemption, but any tax planning based on the "letter of the law" may well be risky, " he concluded.

Ashfords is regulated by the Solicitors Regulation Authority. The information in this article is intended to be general information about English law only and not comprehensive. It is not to be relied on as legal advice nor as an alternative to taking professional advice relating to specific circumstances.