Date of issue: 16th December 2003

Poison Chalice For Not-For-Profit Performing Arts

Chartered accountants Clement Keys, Birmingham has branded Customs and Excise's announcement regarding changes in the treatment of VAT on events such as Christmas pantomimes a poison chalice for not-for-profit organisations.

Customs and Excise has declared that charities and other non-profit-making enterprises will have to treat income they generate through theatrical, musical or choreographic performances as exempt from VAT. The ruling is effective from 1st June 2004 and applies to all organisations which can be regarded as a 'qualifying body'.

In general terms a 'qualifying body' is a non-profit-making organisation managed and administered on an essentially voluntary basis, which reinvests any surpluses generated from performing arts activities. The criteria for a 'qualifying body' also stipulate that these funds must be ploughed back into the development or improvement of the facilities used to stage the shows and events.

"On the face of it this may seem like good news, but the ruling is, in fact, a most unwelcome Christmas gift as far as not-for-profit organisations are concerned," says Steven Simmonds, Director of VAT services at Clement Keys, Birmingham.

"The down side is that VAT on the costs associated with staging theatrical productions and the like, plus the general running costs of the institution itself, may not be recoverable.

"Indeed, organisations which rely on grants or donations to enable them to present dramas, musicals and dance events may find themselves worse off."

This change in the VAT rules is also likely to have an unfavourable impact on organisations that are planning capital expenditure in the near future. They will discover that costs have effectively risen by 17.5%, as they are now unable to reclaim VAT on the building costs.

Clement Keys, Birmingham points out that these changes could also affect museums, art galleries and zoos run by not-for-profit concerns.

Any institution which believes it may be a 'qualifying body' is therefore urged to obtain professional advice before the new VAT ruling comes into force next summer.