VAT minus Zero – no limit
VAT is a pain in the arts. My two recent columns on the subject – Vexing Art Toll? (AM No 24) and VAT Revisited (AM No 29) – have aroused so much interest and controversy that I feel some further points require comments.
lan Birksted writes –
“If a gallery selling on commission should charge VAT to the artist on his part of the sale, then the artist who is selling less than £10,000 per year should register voluntarily for VAT. Could you explain to me how this is done?
If a gallery is selling work which it owns and therefore VAT is charged only on the gross profit of the sale, how should the invoice to the client be worded?”
Voluntary VAT registration is achieved by writting to the Customs and Excise VAT Office nearest to your principle place of business: state the nature of your business (i.e. professional artist); explain that you feel you are at an unfair disadvantage compared with your VAT-registered colleagues and other business competitors who are able to claim back ‘Input Tax’ paid ‘out’ on materials and services: and ask to be allowed to register voluntarily. Once voluntary registration has been allowed, it will normally remain in force for at least two years.
When a gallery sells work which it owns, it should only charge VAT to the buyer if it is VAT-registered. The gallery must issue an invoice to the client-buyer showing the following information:
- identifying number of invoice
- gallery’s name and address and VAT registration number
- date of transaction
- buyer’s name and address
- description of piece
- gross price inclusive of VAT and, if paid wholly or partly by the exchange of other goods, the identifying details of those goods and the amount allowed for them.
The gallery must keep a copy of the invoice and must certify on it that:
‘Input Tax deduction will not be claimed by the gallery in respect of the goods sold on this invoice’, and must sign and date the certificate. Then, the buyer must sign and date the invoice certifying that s/he is the buyer of the piece at the stated price. The gallery must also cross-reference each purchase to the stock number in the stock book and to the relevant folio of any day book.
Moreover, when initially buying in the piece from the artist for re-sale purposes, the gallery must give the artist an invoice in similar terms, signed and dated, which the artist must also sign and date.
All of this administration, of course, could easily be achieved through the use of contracts of sale which should include all the required particulars anyway – and the use of which has been advocated at nauseam in these columns for the last three years.
Anita Besson’s welcome response (in the last issue) is symptomatic of the difficulty in expressing a clear picture of VAT. By ‘Input Tax’ she is referring to VAT which a VAT-registered artist has paid ‘out’ for materials and services, and which can be reclaimed from the Customs and Excise VAT Office – but only at the end of the accounting period (which could be months away).
Her statement of the final result is true, but only of the position at the end of the accounting period. My ‘net result’ is also true, but only of the position immediately after the sale: it was intended to show how the purchaser’s money should pass through the gallery’s hands – and also in certain cases how it is that the purchaser’s money does not pass through in the correct way.
Of course, any well-run and well-informed galllery should first ask whether an artist is VAT-registered. However, my experience in dealing with both artists and galleries has shown me the general extent of ignorance and/or misunderstanding of VAT law and practice; the article makes a contribution to dispelling this.
Ian’s point concerning voluntary registration is most welcome, and is important to understand, particularly if the national campaign for the zero-rating of art (visual or otherwise) succeeds. When that happens, nearly all artists would, in my opinion, find it highly beneficial to register for VAT. Why?
Take these simple examples:
When the sale of art is rated at l5% VAT-registered artist supplies goods and services totalling £5,000 + £750 VAT per annum; spends £4,000 + £600 VAT on purchase of goods and materials during the same year.
- Output Tax (i.e. VAT received) = £750 Input Tax (i.e. VAT paid out) = £600
- Output Tax minus Input Tax = amount to send to Customs. Therefore, artist sends £150 to Customs at the end of the year.
When the sale of art is zero-rated VAT-registered artist supplies goods and services totalling £5,000 + NO VAT per annum (because art is zero-rated); spends £4,000 + £600 VAT on purchase of goods and materials during the same year.
- Output Tax (i.e. VAT received) = NIL. Input Tax (i.e. VAT paid out) = £600
- Output Tax minus Input Tax = amount to send to Customs. Therefore, artist is minus £600 and will be entitled to claim £600 back from the Customs at the end of the year.
Zero-rating of visual art sales would enable all artists (if VAT-registered) to purchase their materials and services free of VAT: in short, the formula ‘VAT minus Zero’ equals ‘no limit’ to public financial support for the arts in a very real, practical and direct way.
© Henry Lydiate 1979