Currently, VAT does not need to be paid on admissions to theatres, concerts, opera, ballet, museums or galleries if they are run by a charitable organisation where no decisions are made by anyone with a 'financial interest' in the organisation. The 'financial interest' condition is meant to ensure that arts organisations could not benefit commercially from their charitable status.
But Longborough Festival Opera, an arts charity based in Gloucester, was stripped of its VAT exemption on ticket sales after HM Customs and Excise officials alleged that a trustee had shown a financial interest in the organisation by agreeing to make good any deficit the charity incurred.
Martin Graham, chairman of the Longborough Festival Opera, accused HM Customs of "shameless conduct" and said the extra 17.5 per cent levy on last season's ticket sales would have a significant effect on the charity.
"It's crazy that we're being penalised because a trustee was committed enough to try and protect the charity's future," he said. "The irony is that we didn't even need to take the trustee up on his offer. Now we're going to have to put up ticket prices next year to account for a tax bill that will amount to thousands of pounds."
Graham Elliot, VAT specialist at chartered accountants Hays Macintyre, said the "vague terminology" of current legislation could prove problematic for many small arts charities struggling to cover deficits in their first few years.
"Arts charities are already under-funded and struggle to cover costs of running theatre, arts or music events," he said. "The legislation was not meant to be used in this way, but it is almost impossible for a court to acknowledge this point as they have to interpret the law as it stands.
"The term 'financial interest', initially introduced to help arts charities, is now being used to trip up organisations whose trustees may agree to guarantee a shortfall," Elliot continued.
"Organisations like Longborough Festival Opera, or those that are just starting up and do not have a financial track record, are often bankrolled by wealthy trustees who have an interest in supporting the organisation through tough times. Without this kind of support and without the VAT exemption, many will find themselves vulnerable and financially unstable."
The Festival Opera is taking the case to a tribunal on 17 November in a bid to get the decision reversed.