Art galleries and VAT
You will have to register for VAT if your taxable sales are likely to be above the current VAT threshold. You will then have to charge VAT at the standard rate of 20% on your commission and on the goods you sell - this is known as 'output tax'. You will be able to reclaim any VAT you pay on purchases - this is known as 'input tax'.
Every quarter you will pay HM Revenue & Customs (HMRC) the difference between:
- all the output tax you have charged
- all the input tax you have paid on your purchases
Nearly all businesses have to pay their VAT bill electronically - for example by direct debit or online banking. HMRC allows you some time at the end of each quarter before you have to pay the VAT due. So, for example, the VAT due on sales made in months one, two and three would be paid at the end of month four. Your VAT return will show your payment deadline date.
Businesses that are having trouble making their VAT payments, or are worried that future payments will cause them problems, can ask for help from the HMRC Business Payment Support Service. If your business needs this financial assistance to tide it over, HMRC will look at your situation and discuss temporary options that could help out. These could include letting you make payments over a longer period and waiving late payment surcharges. To discuss payment problems with HMRC you can call the Business Payment Support Service Helpline on 0300 200 3835.
Most of the goods and services you offer will be standard rated, but books are zero rated.
If you plan to deal in antique and pre-owned pieces of art you might want to use the second-hand margin scheme. This allows you to calculate how much VAT is due by reference to the difference between what you pay for the goods and what you sell them for (your 'margin') instead of on the full retail value of the goods. The margin includes the VAT due.
You will have estimated your monthly sales income. Now you should decide whether you must register for VAT. If so estimate the approximate amount of VAT that you will have to pay every quarter.
VAT when selling art works on commission
The VAT situation can sometimes be quite complex when a gallery sells art works on commission as an agent of the artist. The VAT position can depend on whether the artist and/or the gallery are VAT registered and whether the gallery is acting as a 'disclosed' or 'undisclosed agent'.
If the artist is VAT registered then VAT must normally be added to the selling price of their work whether your gallery is VAT registered or not. The artist is required to account for the VAT.
If your gallery is VAT registered and acts as an undisclosed agent, then you will have to add VAT to the commission fees you charge to artists when you sell their work, and account for this VAT. But artists who are not VAT registered can take steps to ensure that their contract with you is such that no VAT is due on the selling price of their work even if your gallery is VAT registered. They can do this by ensuring that they contract with you acting as a disclosed agent and invoice the customer themselves. Then the only supply that you make for VAT purposes will be the provision of your services to your principal.
You can contact the VAT Helpline on 0300 200 3700 to request further guidance if you need it. You can also download helpful leaflets including VAT Notice 700/1, Should I be Registered for VAT? and Notice 718, The VAT Margin Scheme and Global Accounting from the Gov.uk website.
The HMRC VAT Helpline will also be able to advise you on using one of the retail schemes. These schemes are used by businesses that deal mainly with members of the public.
The Fine Art Trade Guild provides a free legal advice line for members, giving professional advice on VAT, tax, consumer and employment law and other legal matters.
Making Tax Digital (MTD) for VAT
Under HMRC's Making Tax Digital initiative, VAT-registered businesses with taxable turnover above the VAT threshold must keep records digitally and use special software to submit their VAT returns. You can find out more about MTD on the Gov.uk website.
Alternative flat rate scheme
You might be interested in an optional flat rate scheme (FRS) for eligible small businesses. Under this scheme you continue to issue tax invoices to VAT registered customers, but the VAT payable every quarter is calculated as a percentage of your VAT-inclusive turnover. You apply the appropriate flat rate percentage for your type of business. This scheme cannot be used with the retail schemes, the margin scheme for second-hand goods or the cash accounting scheme. You can find full details of the FRS, who can use it, and the flat rate percentages in VAT Notice 733, Flat rate scheme for small businesses. It will help you to decide whether or not the scheme is suitable for you.