Museum VAT and Heritage VAT

The VAT treatment of museums and heritage organisations varies depending museum VATupon the type of organisation.

Commercial or Private Museums and Attractions

Museums that charge for entry will normally charge VAT on their admissions. This allows them to recover the VAT they incur on their costs.

Where no admission charge is made income might still be  generated within the museum. For example there may be retail sales, catering or rides. In my view,  in such cases any VAT incurred should normally be recoverable. Unfortunately HMRC do not always accept this. They sometimes  argue that free admission must automatically mean there is non business activity. With a normal commercial attraction this argument is unlikely to be correct. This is because   there clearly is a commercial rationale to allowing the public in for free.

The VAT recovery position of a free entry commercial attraction was considered in the European Court case of Sveda.

Sometimes museums are formed from private collections where the public are granted access. If a charge is made there may be a business activity is taking place that allows VAT registration. This will mean it is possible to recover some of the VAT on costs. Whether HMRC will accept this and the extent to which VAT is recoverable will depend upon the facts. They should not reject registration on the basis that costs exceed income as a loss making activity can still be business for VAT purposes.

Charity Museums and Attractions

VAT Cultural Exemption

When an entry charge is made it may be VAT exempt under the VAT cultural exemption. This applies to supplies of admission made by non profit making bodies that are controlled and administered on an essentially voluntary basis. Quite what this means is still the subject of debate. HMRC policy makes a distinction between organisations with active paid management teams that make all major decisions and ones where decisions are made by trustees. They argue the former cannot be within the exemption.

HMRC policy is that some admissions are not covered by the exemption. e.g. they do not accept it applies if you charge for entry to a garden.

In practice whether the cultural exemption applies is often a grey area. This is not necessarily a bad thing as many organisations lose out from the exemption. The current rules also mean it is possible to arrange your affairs so that you can escape from the exemption if this is beneficial. For example if you undertake an expensive project and need to recover associated VAT.

Cultural Exemption VAT Recovery

The downside of the cultural exemption is that it results in a VAT recovery restriction. Any VAT that relates directly (is attributable) to the exempt supply of admission is irrecoverable. However, VAT that relates to both exempt admissions and taxable supplies (residual VAT) is partly recoverable. Deciding whether VAT is wholly irrecoverable or recoverable in part is an essential part of the partial exemption calculation. It is  not surprisingly often a cause of dispute.

Generally HMRC take a hard line on recovering VAT on permanent exhibition costs. They view them as being wholly attributable to the exempt supply of admission and irrecoverable. This is not always correct.  Often there are taxable supplies sufficiently connected to the exhibition expenditure for some of the costs to be treated as residual. For example there may be sales made in historic shops in an open air museum or publications that interpret the collection. One appeal that concerned this was the 2013 Roald Dahl Museum appeal which I was involved with. Here HMRC lost and the VAT on exhibition costs was accepted to be partly recoverable.

A  museum with exempt admission income should ensure that their partial exemption method is optimal. The standard (or default) method is based on income and this may give a lower recovery than a special method.

The HMRC notice that explains their policy on the cultural exemption can be found here

Free Admissions

Where no charge is made for admission then HMRC generally take the view that there is a non business activity. This is not automatically correct if the decision to grant free public access is a commercial one. i.e.  revenue is generated from shops, cafes and other charges. This was the subject of the European Court Sveda case. See Sveda Case

Where a non business activity is undertaken then VAT recovery is restricted. The exception is if  the museum is designated as a national museum. These are  allowed to recover VAT on non business activity under a special VAT refund scheme. This was introduced to allow museums to offer free public admissions without suffering a VAT restriction. Prior to it many museums were introducing charges partly to ensure that they were in business for VAT purposes and could recover VAT.

Ironically since the introduction of the refund scheme the rules concerning the cultural exemption have also changed.  It is now possible that a free museum which introduces charges could find itself making exempt supplies. Meaning charges could actually now  reduce VAT recovery. Unlike partial exemption where the method you must use is clearly set out in law, the rules concerning a non business restriction are a lot more flexible. You do not need formal HMRC permission to improve your method providing it gives a fair and reasonable result.

There are lots of possible business/non business methods.  I can advise if adopting a different one will improve your VAT recovery.

Ex Local Authority Museums

Increasingly local authorities are passing the operation of their museums over to charities. Where this happens it may be possible to treat money paid by the local authority to support the museum as payment for a taxable supply. This can improve a museums VAT recovery.

Contact Me

Museum VAT can be complex but I have advised on it for many years. See my museum services page for information of how I can help. If you would like to receive my occasional newsletter then subscribe here

If you have any question or would like to discuss your situation on a free no obligation basis then contact me