Finance: VAT shock for cultural charities

Small cultural charities such as museums and theatres could be "taxed out of existence", according to the Longborough Festival Opera, after the VAT tribunal rejected its appeal against the withdrawal of the charity's VAT exemption.

Cultural charities do not have to pay VAT on ticket sales provided that no one with a "financial interest" in an organisation makes decisions about the way in which it is run.

But this exempt status is now in doubt after the VAT tribunal upheld an HM Revenue & Customs decision to withdraw the Gloucestershire-based opera's exemption from the tax.

The organisation is now planning to lodge an appeal against the tribunal's decision with the High Court.

The charity lost its exempt status because its founder, Martin Graham, was deemed to have a "financial interest" in the organisation in that he had agreed to underwrite any losses incurred by the opera.

A statement issued by the opera said: "The tribunal infers that Martin Graham's reassurances to trustees could give him an interest in 'ordering Longborough Festival Opera's affairs in such a way as to ensure that his guarantee will never have to be met'.

"This decision will have far-reaching consequences for virtually every VAT-exempt charity in the UK."

Graham said: "HMRC will be bearing down on little charities and taxing them out of existence."

When the opera first heard it would lose its exempt status, it said it would be forced to increase ticket prices to pay the 17.5 per cent VAT levy on sales. It said the tribunal had also ruled that it was not entitled to the exemption because the charity's constitution did not forbid the distribution of profits to its members, even though profits were never actually distributed in practice.

Graham Elliot, a VAT specialist at chartered accountants Hays MacInytre, said it was normal for charities' constitutions to permit the distribution of profits, regardless of whether profits were distributed to members or not.

He said: "Most charities' constitutions have flexibility in this area, but I understand this should be interpreted as what actually does happen rather than what could happen. If it is interpreted in this way, very few charities will qualify for an exemption."

A spokesman for the VAT and duties tribunal said details of the decision would be published later this month.

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