Vexing Art Toll?

VAT is an accountancy nightmare but, handled properly, can be turned to good advantage – even for artists. Myths abound; perhaps they can be dispelled. Let’s try.

Every artist should ask the following questions:

  1. Do I carry on a ‘business’?
    Occupations generally regarded as trades, professions or vocations, or continuing activities which involve supplying goods or services (even if made irregularly or on a non -profit basis), are treated as ‘businesses’ for VAT purposes. This definition should include most artists.
  2. Do I supply ‘goods and/or services’?
    Supplies include sales, free gifts, loans, barters, exchange of services (but not given free of charge) made in the course of a ‘business’. Artworks, art books and publications, lectures on or about art given for profit, will all be supplies for VAT purposes.
  3. Are my supplies of ‘goods and services’ made in the course of my ‘business’ likely to exceed £10,000 within the next 12 months?
    If YES, you must notify the Customs and Excise and become a ‘registered person’ for VAT purposes.
    If NO, ask yourself question 4 every January, April, July, October.
  4. Did my supplies of ‘goods and services’ in the past quarter exceed £3,500?
    If YES, you must notify the Customs and Excise within 10 days and become registered for VAT.
    If NO, ask question 5.
  5. Did my supplies of ‘goods and services’ in the past two quarters exceed £6,000?
    If YES, you must notify the Customs and Excise within 10 days and become registered for VAT.
    If NO, ask question 6.
  6. Did my supplies of ‘goods and services’ over the past three-quarters exceed £8,500?
    If YES, you must notify the Customs and Excise within 10 days and become registered for VAT.
    If NO, ask question 7.
  7. Did my supplies of ‘goods and services’ over the past year exceed £10,000?
    If YES, you must notify the Customs and Excise within 10 days and become registered for VAT.
    If NO, you must ask yourself questions: 3-7 above, every January, April, July, October.

Failure to ask these questions could prove tricky, because if you don’t register with the Customs and Excise for VAT when you should have done, you could be guilty of a criminal offence and you may be liable to pay arrears of VAT without being allowed credit for any VAT you have paid out when buying materials or services in the course of your ‘business’.

Voluntary Registration
If you make supplies of ‘goods and services’ below the limits stated above, you may consider that your ‘business’ will suffer if you are not registered for VAT. For example, you won’t be able to claim credit for VAT you have paid when purchasing materials and services in the course of your ‘business’ as an artist. In such circumstances you can register for VAT voluntarily by writing to the Customs and Excise explaining the nature of your ‘business’ and why you want to be registered. Before doing this, however, you should carefully consider whether the advantages of VAT registration outweigh the amount of work you may have to put in when making VAT returns to the Customs and Excise every quarter.

Advantages of Registration for VAT
A registered person must charge VAT on ‘goods and services’ supplied in the course of ‘business’. Any VAT a registered person has paid out when purchasing materials or services in the course of business (Input Tax) is deducted from any VAT charged on supplies of goods and services (Output Tax), and the balance (if any) is sent to the Customs and Excise.

In effect, this means that artists can get back any VAT paid out for materials and services – which can far exceed any VAT charged on sales of work or provision of services as an artist. For example, an artist spends £2,000 per year on materials and services, plus £160 VAT; and sells work during that year totalling £1,000, plus £80 VAT. The artist keeps the £80 VAT and is £80 in credit for VAT purposes.

Many artists may find the idea of registering for VAT quite horrifying, but they must bear in mind that whilst artists’ materials are still VAT-able at 8% there could be considerable financial savings from undertaking the chore of making VAT records and returns – particularly for printmakers, photographers, and sculptors whose materials are often VAT- able at 12.5%.

What do I have to do after registration?

  1. Record all supplies goods and services, plus VAT charged on them.
  2. Issue invoices showing any VAT charged (Output Tax).
  3. Record all purchases of materials and services plus VAT paid on them (Input Tax).
  4. Work out the difference between your Input Tax and Output Tax at the end of each tax period and fill it in on your VAT return.
  5. Keep a VAT account.

(All these records should have been kept in any event for income tax purposes, so little extra work would be involved. And, of course, an accountant could more easily handle your VAT when dealing with your income tax, if you have kept such records. See Art Monthly No. 16).

Galleries and VAT
Many galleries charge VAT on sales as a matter of course. This is quite wrong. VAT should be charged only when the seller is a person registered for VAT. Many galleries sell work for the artist as the artist’s agent, which means that the seller is really the artist and not the gallery. It follows, therefore, that in such circumstances VAT should be charged only when the artist is a person registered for VAT purposes.

Of course, any commission charged to the artist by the gallery for its work as an agent is a VAT-able service and should be charged as such if the gallery is registered for VAT purposes. For example: artist consigns work to gallery to sell as artist’s agent for £100 at 30% commission. Artist is not registered for VAT; gallery is registered for VAT. Purchaser pays £100 (no VAT). Gallery takes commission of £30 + £2.40p VAT.

If artist is registered for VAT and so is the gallery, then: Purchaser pays £100 + £8 VAT. Gallery takes commission of £30 + £2.40p VAT. Artist gets £75.60p.

It is, therefore, most important for artists and galleries to clarify their relationship at the outset; whether the gallery is acting as artist’s agent or as seller in its own right. Written agreements are the answer; see Art Monthly Nos. 11, 12, and 15.

… or Re-sale Royalty Scheme?
Special VAT rules have been devised by the Treasury to help art dealers; they only have to charge VAT on the profit they make when re-selling work. How simple it would be for the government to add an extra percentage to the VAT charged by art dealers and treat the extra money collected as an artist’s Re-sale Royalty. Such sums of money collected in this way could be put into a national art fund for the benefit of the art community generally.

Such a scheme might solve two major objections to the introduction of a national re-sale royalty scheme; that it could not be effectively administered; and that it would only benefit successful artists selling work for high prices through galleries. Just a thought.

© Henry Lydiate 1979

 

 

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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.