VAT row – how the EU fudged it

The Commission has ignored the facts, massaged the statistics to suit its arguments, shown a basic lack of understanding of the way VAT works, and come to a general conclusion that lacks logic, says Mark Dodgson, deputy secretary general of the British Antique Dealers’ Association and British Art Market Federation executive member, who has produced a scathing analysis of the Commission’s conclusions.

He told the Antiques Trade Gazette: “Having read both the Commission’s report and that compiled for them by the independent researchers, MTI, I see that on the one hand the Commission argues that imposing the VAT increase has no impact on the competitiveness of the European market compared to other markets, yet on the other hand it does not want the UK to retain a rate lower than other EU countries. That would be a distortion in Europe.

“The Commission cannot have it both ways; either imposing more VAT has an adverse effect on markets or not. If rates of import VAT vary in different European countries and this can be claimed to have a negative impact where tax rates are higher, then it does not need a huge leap of intellect to understand that if we tax transactions more highly in the UK than they do in New York we will lose business.”

Mr Dodgson has illustrated four points from the Commission’s conclusions to show how its arguments fail to pass muster:

• Factual errors show that the Commission draws its conclusions for the whole art and antiques market based only on figures for pictures, which make up only 31 per cent of the market.
• The Commission quotes figures that show an expansion in the UK pictures market after the introduction of the 2.5 per cent VAT rate in 1994, but fails to use figures from the MTI report which show that the US market expanded at more than twice the overall EU rate.
• The Commission shows that it does not understand the workings of VAT. It claims that the VAT effect is “neutral” as a Community purchaser has to pay the same amount of VAT wherever he buys works of art. Therefore, argues the Commission, it is “irrelevant” where a Community purchaser buys works of art, unless they have been smuggled. But Mr Dodgson points out that the Commission ignores the fact that dealers operate the margin scheme. He argues that if you pay import VAT you are not permitted to reclaim this if you sell under the scheme. The transaction is thus subjected to a higher level of tax. It is therefore clearly not “irrelevant” where the “work of art” comes from.
• The Commission concludes that: “For VAT purposes works of art are treated like any other goods”. But unlike “other goods”, antiques and works of art (now also secondhand goods) are usually taxed for VAT purposes on the profit margin. The special scheme recognises that there is never any final consumer of antiques and therefore to tax buyers on the full value each time represents double (indeed multiple) taxation.
• The Commission states that it is important to assess whether or not the application of the VAT increase puts the art market at a disadvantage compared with sales taxes applied to other markets. It then fails to compare the workings of Europe’s VAT with consumer taxes elsewhere, notably the State of New York. Mr Dodgson’s table (please see Gazette issue 1389, page 3) compares the UK and New York markets and shows the final prices paid by a British resident compared with a New Yorker. To make for a meaningful comparison the dealers’ profits are kept constant. The results show a wide divergence in the prices paid as a result of VAT and its doubling.

Mr Dodgson is clear that there are other parts of the Commission’s conclusions from the MTI report which do not add up and refers to the “many distortions and errors” within them, concluding that it is “hard to believe that anyone can take them seriously”. He declared himself “stupefied” that the Commission failed to demonstrate any typical transactions with sample figures to show the effects of the tax – all the examples shown here are his own taken from the MTI figures and the Commission’s own information. He is firmly supported by Anthony Browne, chairman of the British Art Market Federation, who declared himself “staggered” that the European Commission should draw the conclusions they have. “For the Commission to say it has found no evidence that import VAT had an effect on the European art market flies in the face of independent research (the MTI report) that it has commissioned.”