Infinity goes up on Trial

The visual art market-place has two essential facets, distinct but clearly interrelated, especially over recent generations: exhibiting and selling.

Dealers usually occupy ‘gallery’ premises: partly for their principal object (making profits from sales); partly for their secondary aim (showing work to the public). Public galleries/museums usually occupy premises: partly for their principal object (showing work to the public); partly, in recent years increasingly, for activities which generate income, for example, selling on commission, retailing publications and other visual or printed matter. These two customary creatures, the private profiteer and the public educationalist, nowadays appear to be coalescing into a single new being: the commercial public gallery.

The hypothesis is this:

1. Public Galleries
Principally educational, housing work for permanent exhibition, their customary needs are clear: premises for such purposes and for personnel handling acquisitions, loans, conservation, curating and security, general and financial administration; funded in large part (until recent years) through tax- or rate-payers’ monies in the form of central/local/regional authorities’ grants, with a few privately endowed. However they are financed, such public endeavours usually have, in law, charitable status, which means:

i Registered Charity.
Whether structured as a privately or publicly funded trust or company limited by guarantee, the Charity Commissioners (the responsible legal authority) have the duty on behalf of the state to examine their constitutions and operations and grant (or revoke) status as a charity and register (or de-register) them accordingly: the sole criterion is whether their aims and objects are for purposes beneficial to the public. In the case of the arts this is usually where the organisation satisfies as being purely and principally educational.

ii Benefits of Registration.
Fifty per cent obligatory relief from payment of Local Rates (chargeable for occupation of premises or land-a substantial annual item of expenditure in many cases, which can make the difference between solvency and bankruptcy); plus relief, this time in the discretion of the Rates authority, for all or part of the remaining fifty per cent. Income or corporation tax is not payable in the event of annual ‘surplus revenue’ (which would otherwise be ‘taxable’ as ‘profit’) being achieved; but only so long as the annual financial surplus of income over expenditure is not derived from engaging in commercial profit-seeking activities which amount to commercial trading (in the view of the Charity Commissioners and Inland Revenue) so as to taint their charitable status as being purely educational. (This latter issue can be fatal: see below). Capacity to receive private or public donations and awards which can or will only be released to registered charities by the rules or policies governing the donor; worthy ventures which are not registered charities will therefore be incapable of receiving such monies – which represent a vast and largely untapped fund, in this country.

Similarly, covenants may be made by donors to registered charities, but not to unregistered though worthy causes. Tax-payers sign a ‘deed’ (of covenant) promising to give £x per annum (for at least three years) to the charity which, by law, may then reclaim from the Inland Revenue the annual tax already paid on such money by the donating tax-payer: in this way the charity receives the annual donation plus the tax already paid on it.

A new facility introduced by the present Government requires employers to make arrangements to deduct from the salary/wages of their employees – only on their written request – donations in favour of registered charities named by the employee. Employers are obliged to comply with such requests and pay the money directly to the charity, themselves bearing the administrative costs of so doing. A far-reaching innovation, also introduced by the present Government, enables registered limited companies to donate up to one per cent of their annual share dividend to registered charities of their own choice and claim such gifts as a tax-deductable expenditure item from their own annual accounts, thereby reducing their taxable profits. In other words, commercial companies can effectively choose a registered charity(ies) and make it (them) a shareholder of up to one per cent of the total annual dividend payment to all shareholders and by so doing reduce their tax bill. This legal provision reflects the present Government’s response to years of pressure from the charities’ lobby for legal fiscal measures to encourage commercial sponsorship, especially over recent years of scythed public expenditure.

iii Legal Status: Trust or Company.
There are two principal legal structures capable of being registered as a charity: a trust, or a company limited by guarantee and registered with the Registrar of Companies. The essential difference between them is that a trust renders the trustees (the legal, but not beneficial, owners of the assets and liabilities of the trust) personally liable for the charity’s debts, whereas a company limited by guarantee renders the directors or members of the council of management (likewise, the legal, not beneficial, owners of the assets and liabilities) personally liable for trading debts, but, only to the amount guaranteed when they signed on as members of the company – the legal minimum being £1 per signed-up director/member.

iv Trading for profit.
The real worry for registered charities, usually desperate to achieve sufficient income to cover the expenditure incurred in benefiting the public, is rooted in those very profit-seeking endeavours. If the Charity Commissioners or Inland Revenue see a charity’s income-earning activities as being so commercial in nature that they taint its true charitable object – in other words, if they see the charity as in reality a trading venture with a charitable heart, then charitable status may be revoked, or not granted. This curious and problematic fact of charitable life has, for many years, provoked in administrators an understandable belief, followed through in customary practice, that trading endeavours of any kind and however minimal are bound to jeopardise the status of the whole charitable venture. Not so; increasingly, imaginative schemes have been put in place to avoid such difficulties. The most successful method, to date, has been the establishment of a commercial trading outfit – a registered company limited by shares (of profits and losses) – whose directors are members of the council of management or trustees of the charity. The commercial company trades in earnest, but covenants any annual profits by deed of gift in favour of the ‘parent’ charity. In this way, the same personnel can legally control both the registered charity and the registered trading company, without the latter tainting the status of the former.

One of the prime examples in the visual field of this type of arrangement, the Institute of Contemporary Arts, is a charity registered both as a trust and a company limited by guarantee of the members of its council of management (who are also the trustees), with objects which are educational, and which funds its whole self through earned income and commercial sponsorship (about seventy per cent), the .Arts Council (about twenty-five per cent), with the balance from various other institutional awards including London boroughs.

Earned income is derived through trading activities in the field of film and television, pursued by the ICA’s own commercial companies vigorously pursuing profits which have been covenanted by deed of gift in favour of the ICA charities. More charities really should begin earnestly considering the full imaginative and vigorous employment of each of the fiscal facilities favouring those registered as such (outlined above) especially following the bold and creative lead shown by the ICA, particularly in the current climate of ever decreasing public expenditure, and especially in the visual arts.

2. Commercial Galleries
Principally profiteering: re-selling bought in work for profit, or selling work consigned by artists for a commission fee. Their needs are clear: storage space for such purposes and for administrative personnel for such functions: but not (contrasting with public galleries) necessarily for permanently curating, conserving and exhibiting such work to the public. Nevertheless, the resources required are expensive, especially the acquisition, occupation and maintenance of appropriately sited premises (usually in highly priced and highly rated areas). Funding, of course, derives from profit, margins for which dictate high commission percentages on sales of consigned works (more than fifty per cent in many cases) and high re-sale prices of bought-in works (or high discounts from the artist when buying-in from the studio).

High overheads, particularly of premises, have caused many commercial galleries to fold, move to less salubrious or smaller sites, or, in some cases, to continue dealing without gallery premises, (using slides/ transparencies/ smaller works/works on paper: the carpet-bag-and-transit-van syndrome). And, of course, those galleries which do continue to maintain premises for their secondary function – exposition of work – cannot claim the benefits deriving from registration as charity. Or can they?

Some commercial gallery administrators, like their imaginative counterparts in the public sector, have successfully reduced their overheads by establishing and registering a charitable trust or company whose objects are – you guessed – educational. The charity purely and principally exhibits visual art for the benefit of the public, housed in premises made available by the commercial dealership (for a peppercorn rent, if need be) which it occupies (rates are payable by the occupier, not the legal owner, of premises) for such purposes. It clearly derives all the benefits of such status (described in I above); the on ‘below stairs’ (as before) but donates up to one per cent of its annual share dividend to its favourite registered charity and thereby reduces its annual tax bill.

3. Synthesis: Commercial Public Galleries
Returning, then, to our original hypothesis – the private profiteer coalescing with the public educationalist – clearly public galleries can, and have every reason to, establish commercial trading companies whose annual profits may be covenanted in total as a gift to their charitable persons, thereby preserving their overall charitable spirit and intent without offending the Charity Commissioners or Inland Revenue.

Equally, private galleries can, and have every reason to do the process in reverse, that is, to establish registered public educational charities to which the private dealership’s corporate profits may be donated, thereby benefiting themselves and the charity. Some, including myself, believe that future public expenditure on the fine arts, and the visual field in particular, will rapidly diminish, eventually disappearing; that it can and should be replaced, if not bettered, through creative utilisation of the law by those administrators, private and public, who are the custodians of the only possible salvation for the future public exposition of visual art in this country.

In them, we place our faith and trust, offering some simple words of encouragement:

Inside the museums, infinity goes up on trial
Voices echo this is what salvation must be like after a while
But Mona Lisa musta had the highway blues
You can tell by the way she smiles.

© Henry Lydiate 1987

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This article is from the Artlaw Archive of Henry Lydiate's columns published in Art Monthly since 1976, and may contain out of date material. The article is for information only, and not for the purpose of providing legal advice. Readers should consult a solicitor for legal advice on specific matters. Artists can get free online legal information from Artquest.