Don’t be tempted to use artistic licence when it comes to VAT

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Fresh from sponsoring the ‘Shock of the Old’ Art Exhibition at the Brighton Media Centre recently – which showcased art from artists Chris Kettle and Jake Wood-Evans - Accordance, the VAT consultancy, is warning art dealers to consider VAT when both buying and selling art.

“Businesses buying and selling works of art must ensure that they are aware of what VAT they need to charge, as well as whether their purchases have the correct VAT applied – given that VAT rates across Europe are as high as 27% in some countries this is particularly important for high value pieces,” explains Andy Spencer, Accordance’s head of consulting.

He continues: “Art dealers may need to review whether the transactions undertaken create additional VAT compliance obligations, including VAT registrations and VAT compliance reporting such as submitting VAT returns, Intrastat reports and EC Sales Lists; obligations vary, each being dependent on the specific business activity.”

Purchasing art
When purchasing pieces of art from UK suppliers, UK VAT will be charged at the applicable rate which can be recovered through the UK VAT return. However, if goods are purchased from suppliers outside of the UK, the VAT treatment applied will be different. Purchases of art from suppliers in EU Member States, other than the UK, should not have VAT applied, provided that the goods leave that Member State and the art dealer provides their UK VAT number to the supplier.

When making purchases from outside the EU, again, VAT shouldn’t apply; but, it is necessary to account for import VAT at the applicable rate on the amount charged and review whether Customs Duties are payable – this will depend on the nature of the goods and the destination they arrive from.

Selling art to private individuals
When artworks are sold to individuals located in the UK, as a domestic supply UK VAT is chargeable at the applicable rate. If goods are sold to private individuals based in EU Member States other than the UK, a UK VAT charge at the applicable rate may still apply, but this will depend on the value of the sale. Businesses must be aware of EU Distance Sales Thresholds; Distance selling takes place when a VAT-registered business in one EU Member State supplies and delivers goods to a customer in another EU Member State who is not registered for VAT.

Distance selling only applies to goods, not services, and most commonly this will be sales to private individuals via mail order or internet trading.

“There is strict legislation in Europe surrounding VAT for businesses making distance sales; thresholds differ across all EU countries, and once breached, businesses are obliged to register for VAT and charge appropriate local VAT on their sales,” Andy explains. “They will then have an obligation to file periodic VAT returns in that Member State. Where sales are made to individuals located outside of the EU, and the appropriate evidence is held, this is treated as an export of goods and no UK, or other VAT will need to be charged.”

Selling art to businesses
When artwork is sold to business customers located in the UK, this will be a domestic supply of goods and UK VAT will be chargeable at the applicable rate. When goods are sold to business customers that are established outside of the UK but within the EU, UK VAT will generally not be chargeable on the supply under Article 138 of the EU VAT Directive.

In order for art dealers not to charge VAT, the EU VAT number of the customer will need to be displayed on the face of the invoice, and proof that the goods have left the UK will need to be obtained. The business customer will then be responsible for declaring the VAT through his local VAT return. If supplies of this nature are made, certain VAT compliance obligations must be met. Where sales are made to business customers located outside of the EU, and the appropriate evidence is held, this is treated as an export and no UK VAT will need to be charged.

Margin scheme for re-sold art
Finally, something art dealing businesses may want to look into is the margin scheme for second-hand goods. This is where, for instance, a company buys a work of art with no VAT on the purchase price, and then sells on the piece to a customer. In this instance VAT need only be accounted for on the profit margin. The margin scheme allows you to pay VAT on the value you added to the goods, rather than on their full selling price.

There are specific rules for defining what the margin is, and also if it is something that your company can participate in at all – for example, technical drawings, scenery for theatres and hand-decorated manufactured items are not included in the specified ‘eligible goods’ under the scheme. A business can join the margin scheme at any point without needing to apply, but must be aware of the documentation that must keep once part of the scheme.

“Record keeping is very important to prove that you have complied with the rules of the scheme – those involved in making margin scheme supplies must keep copies of sales and purchase invoices, and a stock book relating to the margin scheme goods,” says Andy. “The records must be kept for six years, which is the standard length of time all VAT registered traders must keep their records for.”

Where a business is not compliant, HMRC has the power to assess the business for the full amount of VAT on the sales price of margin scheme goods (as opposed to VAT on the profit margin, if any). Therefore, it is clearly in the financial interest of the trader to comply, as non-compliance will have a negative financial effect. As well as this, traders can also be liable to the standard penalties where returns/payment is late or output tax is under-declared.

Notes to editors:

  •     Accordance is a unified VAT Compliance and Consulting practice, with a focus on cross-border transactions.
  •     The company provides practical, commercially beneficial VAT assistance to blue-chip companies across the EU and beyond.
  •     Accordance assists a full spectrum of international businesses better manage cross-border VAT costs.
  •     The company reaches across Europe, but manages all work from an accessible and responsive hub in the UK.
  •     Accordance often works with accountants, acting as an ‘outsourced VAT department’ for their clients.
  •     The Accordance team includes senior ex-Big 4 VAT personnel, expert European VAT Compliance management, VAT legal specialists, Customs and Duty Experts and VAT savings experts.

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Angela Ward
The Marketing Eye
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