Customs & Excise is considering whether to challenge a European Court of Justice decision that could "financially cripple
voluntary-sector museums and galleries.
The ruling means that although cultural charities would no longer have to charge VAT on ticket sales, they would also be unable to recover VAT on expenditure. As mainly grant-maintained organisations, spending more than they receive in ticket sales, they pay more tax.
In March, the European Court ruled against a Customs-imposed restriction on a 1996 VAT exemption for admission charges to cultural organisations such as museums, galleries, theatres and zoos.
The restriction limited the exemption to non-profit bodies managed solely by volunteers, which meant it did not apply to most charities, which employ at least some salaried staff.
The restriction was welcomed by most arts-sector charities but was challenged by London Zoo, which is largely funded by money from ticket sales.
The European Court ruled that the exemption should apply to all organisations whose policy making was determined by volunteers. This includes all charities since policy making ultimately resides with volunteer trustees.
According to Peter Ladanyi, charity VAT manager at accountants Chantrey Vellacott, this could prove "disastrous
for charging cultural voluntary organisations such as museums and galleries. They will not only pay more tax in future but could also be forced to repay tax they have recovered on new buildings.
"The imposition of a VAT exemption could financially cripple much of the museum and cultural sector - especially if they have to pay back VAT they have already claimed on work done in the past 10 years,