HL Deb 25 November 1986 vol 482 cc513-30

8.17 p.m.

Lord Fanshawe of Richmond rose to ask Her Majesty's Government whether they will take steps to safeguard the British art market in the negotiations within the Council of Ministers of the European Community over the 7th and 18th VAT Directives.

The noble Lord said: My Lord, some noble Lords may be wondering why I have put down a Question this evening on a subject (namely, the arts) which will be discussed at some length tomorrow. My reason is that this subject which I hope to explain to your Lordships this evening, is so important,and is particularly a Treasury matter, that I felt —and I think many people who are interested in the arts world in London felt—that we should have a specific discussion on it. I also ask the Question in an endeavour to remove uncertainty on an issue which is causing concern at the moment throughout the art market in Britain.

First, perhaps I may ask why Britain is the centre of the world art market. As Paul Whitfield of Christie's said in an outstanding speech at a recent seminar arranged by the European movement:

"The British have always been great collectors. Rather as some countries always seem to produce composers, and others performers, the British have since the seventeenth century been known for the richness and quality of their collections. Fortunately, during the last three centuries, or at any rate up until the last war, we were, nationally, able to afford the hobby—and also as great travellers had the knack of being in the right place at the right time, which for the collector is as important as the wherewithal itself. The countries which we colonised and which became pink on the maps also made their contributions: Moghul jade and Hindu bronzes in exchange for the English language, our legal system and Brown Windsor soup. Not a bad bargain, but perhaps not everyone would agree.

"And so the great houses of Britain, and tens of thousands of smaller mansions, villas and retired sea captains' cottages, became a bulging treasure trove of everything imaginable, not just the home-produced Georgian furniture and silver, nor the classic Italian and Dutch old masters, but also of German porcelain, Italian glass, Persian carpets, Chinese porcelain, Maori feathered cloaks and Japanese ivories. And when it came to trading these treasures and curiosities, the British evolved a system in the eighteenth century—the time when the great auction houses sprang up—a system which has survived and prospered to this day. There is something about the open and simple bargain, binding both parties in a relaxed but efficient market place which appeals greatly to our national temperament.

"The development of the Stock Exchange, and of the other great exchanges, Baltic, coal and so on; and of Lloyd's insurance market, and of the auction system, all seem to point to this. Hand in hand with this expansion of the basic wholesale market has come a tremendous proliferation of antique dealers in the widest sense. There is certainly no city in the world with as many specialists in such an incredible range of subjects. Certainly not in New York. I do not think that Paris could be included: there is not the sheer spread that is to be found here in London. Figures for the whole of this market are not easy to come by—so some informed guesswork will have to do".

Mr. Whitfield estimated,

"the combined total of United Kingdom fine art auction sales to be in the region of $460 million. Sales by dealers will, naturally enough, come largely from this figure, or rather the proportion of it not accounted for by private or overseas purchases, plus a percentage mark-up. But it will also include a significant amount of purchases made outside the auction market here or abroad—private purchases, for instance. And it is therefore possible to infer that the total annual value of the UK art market is somewhere in the region of £800 to £900 million. Of this figure, the major auction houses consistently report that their sales in London include roughly 30 per cent. of consignments from abroad. A somewhat similar level of purchases abroad by the dealers can be assumed. These are direct imports, many of which may be re-exported. After, that is, the London art market has earned its share of commission, insurance premium, restoration costs, packing and shipping, advertising revenues and so on. Not to mention the considerable but unquantifiable sums spent in the West End hotels, restaurants and shops by the overseas dealers here to attend the sales. One has only to stand in King Street or Bond Street after a major picture sale to realise this.".

I have made a very lengthy quotation from Paul Whitfield's speech, but it is a most impressive description of what we see in London today of an art market that is not just the centre for Britain but the centre for the Community, and it is important to realise this.

The proposals of the draft 7th European Community directive seem to bring about the imposition of a 15 per cent. value added tax to the importation of works of art into this country as well as to other countries of the Community. The 18th directive, which may be puzzling some of your Lordships, ends derogations that were allowed under the 6th directive and would have a similar effect, particularly for the treatment of auctioneers. The implementation of this directive will mean that the sale of any work of art will start with a premium on its total market value, and this premium will double when an item is sold by a private UK collector. In the past VAT has been levied at auctions not on the estimated market value but on the service charge and as far as registered dealers are concerned on what is termed the margin, the profit on their purchase price.

Mr. Denys Sutton, who is a most distinguished editor, writes in his magazine Apollo in an article which is to be published next month: "This charge initiated in 1973 has been accepted as a compromise but it is still opposed by our national museums who maintain that they should be freed from VAT on a par with overseas buyers. In fact what is now being proposed is that on each occasion that a work of art passes from one European Community country to another, or enters the European Community from outside, it will carry VAT. Every time it is sold within the Community it will attract more VAT. In other words the work of art will be subjected to the 'cascade principle' so that before long the VAT payment could well be greater than the intrinsic market value of the work of art in question".

The latest draft 7th directive will impose VAT on the full sale price whenever a work of art comes to market. That is bad enough, but in addition the 15 per cent. charge on imports would, as Geraldine Norman wrote recently in The Times, "be lethal". The loss to this country and the damage to our centre as a world market will be underlined when your Lordships realise that for the first time for many years the Impressionist sales planned for London this autumn will outclass New York. Somewhere between 60 million and 70 million dollars is thought to be the figure that could be raised between the two leading auctioneers, Christie's and Sotheby's.

If the proposal is agreed in Brussels, what will happen? The international art market will move not to Paris, not to Brussels, not to Rome, not even to Munich; it will move to New York or to Geneva. Not only Britain but Europe will be the loser. In addition, import tax will deter those wishing to bring or sell works of art into this country. We have only to remember the sale last week of a Constable for £2.5 million at Christie's and ask ourselves whether that private owner or collector in New York would have shipped the picture to London to be sold in Christie's, with all the benefits that provided for Britain and the Community, if he was to be charged 15 per cent. on the value before he brought it through Customs. I very much doubt whether he would. He would have flogged it in New York or sent it to Geneva or somewhere else where he would not have to pay that sort of tax.

I am not suggesting that we should have a tax advantage over our European friends. I wish Her Majesty's Government to stop the European Community putting itself at a disadvantage against the rest of the world. Either Europe goes our way or we lose. I hope that I have made it clear that the reason for that happening is because—this is a fundamental point—it is the United Kingdom tax regime that sets the environment for our success as a world centre.

I am glad that the noble Lord, Lord Diamond, who played such an important part in our Treasury as a Minister some years ago, is planning to take part in this debate. He knows how important the tax regime is in maintaining an international art market in London. In order to keep it that way, it is most important not only that we have the advantage of the entrepot of experts in London but that works of art move in and out of the country without restriction.

What am I asking tonight? I am asking Ministers this evening to fight our corner and that of the interests of the European Community as a whole. I also hope that my noble friend Lord Cockfield who is one of our Commissioners in Brussels, will take the same view. There are rumours in London that he is responsible for pressing for action that will damage Europe's international market. But where is Europe's international market in the art trade? It is here in London, in Britain. We are members of the Community, and we are managing to bring a great deal of profit and help to the Community as a whole, not just to Britain.

Your Lordships expressed your concern some years ago in the 1977–78 31st Report of the Select Committee on the European Communities entitled VAT on Second-Hand Goods at page vi, paragraph 15. As on other issues in our political and public life, your Lordships' House was ahead of the game as usual and in 1977–78 had already realised how important this issue was.

I have two important questions to which we need a reply this evening. First, I hope that my noble friend the Minister will tell us the position under the Single European Act, which was passed in the last Session of Parliament. Does this mean, in the final analysis, that the United Kingdom will be voted down in Brussels? This did not seem to be indicated in the letter sent to Hugh Leggatt, a leading dealer and a member of the Museums and Galleries Commission, on 6th November of this year by my right honourable friend Richard Luce, Minister for the Arts. He states in his letter: Decisions on the implementation of this would be for unanimous decision by the Council of Ministers". I should be grateful for an explanation from my noble friend.

Secondly, the same letter goes on to suggest: The appeal procedure through the European Court of Justice could overrule the views and decisions of the United Kingdom Government". Is that correct? I must assume that it is since it has been written in a formal ministerial letter. If it is correct, it will result in a very grave situation in the long term and I should like to know this evening how this will affect the position of the United Kingdom Government. I assume that we will continue to fight, if necessary, in the European Court of Justice on the European case, because (as I hope I have indicated this evening) I am making a European as well as a British case. I believe that case would stand up in the European Court of Justice if, as I hope it never will, the case ever gets there. I should be grateful for clarification from my noble friend.

It is rare that the art world is unanimous about anything, but on this occasion it is. I have not mentioned furniture dealers this evening but there is a very important letter in today's Financial Times from Mr. George Levy of Blairman's. Auctioneers, dealers, galleries and collectors are all deeply concerned. They are supported by Members of both Houses of Parliament and I suspect by all political parties.

While encouragement of our cultural heritage and the build-up of our new European collections is a keystone of Government policy, this proposal will be disastrous for the private European collections. As Professor Brian Morris, chairman of the Museums and Galleries Commission, will confirm, it will have a grave effect on museums throughout Britain. My noble friend Lord Windlesham, chairman of the British Museum, is unfortunately unable to be here tonight. He would, I know, fully support my remarks on this subject, as I have discussed it with him prior to this evening.

I apologise for the time I have taken, but this is an important issue and a complicated one. In conclusion, I should like to say how particularly glad I am that my noble friend Lord Poltimore is making his maiden speech this evening. I know that his first hand knowledge gained working with Christie's will be of great value to our debate tonight and I look forward to hearing his views. I should also like to say how glad I am that my noble friend Lord Beaverbrook is making his maiden speech on an arts subject at the Dispatch Box the evening. All of us in all parties tonight will expect him and the Government to fight and win our case in Brussels. I hope that the reply of my noble friend will make clear the attitude of the Government on this matter.

8.33 p.m.

Lord Poltimore

My Lords, this is the first time that I have had the honour of speaking in your Lordships' House. Perhaps I may thank noble Lords in advance for listening to what I have to say. I fully agree with my noble friend Lord Fanshawe, who, in his excellent speech, dealt with most of the points I wished to raise with an eloquence that I cannot match. I know little about many of the subjects which are debated in this House, but, having worked in the art trade for almost 10 years, I feel I can speak with some knowledge on this subject. I also declare an interest in this matter.

In the face of considerable opposition from America and Switzerland, London has since the war established its position as a centre of the art world, largely due to being free of import and export taxes. If VAT is charged on the import of works of art into this country and indeed on the sale of any work of art, London will cease to be an international market-place and millions of pounds worth of trade will not be imported into this country. This does not include invisible earnings generated by the successful market from air tickets, shipping, restoration and the foreigners who, as my noble friend Lord Fanshawe has said, shop in our cities, stay in our hotels and eat in our restaurants. Without doubt it would be bad for Britain in terms of national income and aesthetic pleasure.

Although it may be tempting to feel that taxing the full value of works of art every time they appear on the market would increase tax revenue, I personally would argue that such a move would kill the goose that laid the golden egg by driving the market out of this country and with it many of the fiscal and other benefits the country derives from such a successful market. Harmonisation for harmonisation's sake seems to be the motive behind the draft Seventh Directive, but how short-sighted can this be? If VAT was introduced, the centre of the art market would move to New York or Geneva. Although London would suffer most, the whole of the EC would also suffer.

It is difficult enough, due to lack of money and the strong purchasing power of the American dollar or Japanese yen, for a museum in this country to buy works of art on the open market; now life will be made even more difficult for our museums by giving them a 15 per cent. disadvantage. Similarly, collectors and dealers alike will find that the Americans, the Swiss and the Japanese will have a 15 per cent. advantage every time they raise their hand at auction or walk into a gallery. Today's private collectors who enrich the museums of the future will certainly be at a disadvantage.

It is often said that our national heritage is being sadly depleted and it seems illogical to impose a system of taxation which gives non-EC buyers an advantage. I have spent many hours in my attic looking for hidden treasures to sell. Alas, there is nothing but dust. However, some noble Lords and many others who have to sell a treasured possession to pay death duties or install a new roof or central heating will, if they want to sell in London under the new tax scheme, suffer from the VAT imposition. One does not need to be a mathematician to work out how much money this entails for a work of art worth thousands of pounds.

If the draft Seventh Directive is passed in its present form I should have to advise anyone to consider selling in America or Switzerland or some other non-EC country. They will be the future centres of the art world. Owners often say they hope their treasured possessions will be bought by a museum in this country or find a good home here. They may well be disappointed.

The magnificent Rubens of Samson and Delilah which was imported into this country was sold to the National Gallery some years ago for almost £2½ million. Only last Friday, as my noble friend Lord Fanshawe said, a picture of Flatford Mill by John Constable which came from America was sold in London for a world record price of £2.4 million, and was secured for England. A Rembrandt, two Franz Hals and some £70 million-worth of Impressionists are coming up for auction in London at the beginning of December alone. This may never happen again. English museums, collectors and the trade will find it almost impossible to compete under the threatened scheme.

A foreign vendor, faced with the prospect of an import tax on his property into the UK, even though the tax payment may be deferred for six months, is likely to decide to sell in other centres where there are no such barriers. In respect of the Rubens which sold for £2½ million, a deposit of £375,000 would have had to be paid to HM Customs well in advance of the sale. In the case of the Constable, some £360,000 would be left at the customs, only to be reclaimed if the object was resold to a non-EC country.

There is a solution which works well in Britain and which we think should perhaps be introduced throughout the EC—the so-called margin scheme, which was so well explained by the noble Lord, Lord Fanshawe. The auctioneers should be taxed in accordance with their status as agents. This would stimulate the art trade in the EC, arguably bringing more tax revenue to the various EC governments, and would enable the EC to compete with the rest of the world. This would be sensible harmonisation.

In conclusion, I must say that we are proud that London is still the centre of the art world and by and large has the best expertise and knowledge available anywhere. The art world, consisting of museums, collectors, auctioneers and dealers, is united in its opposition to the draft Seventh Directive. I urge noble Lords and the Government to oppose the draft Seventh Directive and the introduction of VAT in this manner, to oppose the centre of the art world moving to America or Switzerland, to oppose this needless incentive for the export of works of art and to oppose the consequential cultural depletion. I urge noble Lords to oppose the draft Seventh Directive, not just for Britain's sake but for the sake of the EC as a whole.

8.41 p.m.

Lord Strabolgi

My Lords, it is a great pleasure and a privilege to congratulate most warmly the noble Lord, Lord Poltimore, on his excellent maiden speech. The noble Lord has spoken with deep knowledge and great sincerity and conviction about a subject on which he is an expert. I understand that the noble Lord is in charge of 19th century paintings at one of our oldest, most respected and most important auction houses in London. I cannot claim the experience or expertise of the noble Lord although I have some knowledge of this field. I agree wholeheartedly with everything he said and I hope that he will speak to us on many other occasions. I hope too that the Government and indeed the Commission will take heed of what the noble Lord has said.

The House is grateful also to the noble Lord, Lord Fanshawe, for asking this Unstarred Question tonight, and from this side of the House I should like to say that I strongly support his speech. I agree with him that the matter is so important that it merits a separate debate.

As has been said, works of art and antiques have hitherto been allowed to be imported without restriction. There are at present no customs duties or import taxes. The draft directive proposes the imposition of VAT on all imports of works of art and collectors' items into this country. This proposal, which amounts to an import tax, would be detrimental to our art trade. As has been said, many sellers would bypass London altogether and sell direct to the United States, Switzerland or Japan. An import tax would deter many collectors in this country, and in the long term our national collections would suffer. As VAT is waived for exports from Britain there would be a great increase in applications for export licences, and a further drain on our national heritage.

Why is it not possible for the EEC to develop its own free market? Why should VAT not be waived on works of art imported between Community countries? This might make some sense and be an encouragement to the free movement of works of art between these countries, to the enrichment of European culture and eventually to that of other countries as well outside the Community.

I should like to ask the noble Lord who is to reply for the Government how many times VAT is to be levied on the same object. The noble Lord, Lord Fanshawe, just touched on this. I should like to ask the noble Lord, Lord Beaverbrook, how many times it is going to be levied. Is it to be three times initially; once when bought on the Continent, twice on import into the United Kingdom, and three times on resale to a client in this country—and on further sales as well, so that eventually the amount of VAT could be greater than the value of the work of art, particularly if it is not in the highest category?

I should also like the Government to confirm that books will continue to be zero rated, as they have always been. Perhaps I may remind the House that during the darkest days of World War II there was a proposal to make books subject to purchase tax. This was heavily defeated in another place when Members on all sides combined to vote down what was considered a short-sighted and philistine measure. Ever since then books have been exempt from purchase tax and VAT. I mention this because I hear perturbing rumours that the Commission in Brussels is planning that by 1991 nothing, not even children's shoes, should be zero-rated or exempted. Rather than harmony, this will bring discord and will have an adverse effect on education and culture. There will be many practical problems if books are to be liable for VAT on importation.

The same thing goes for far cheaper works of art. Noble Lords have spoken tonight about the expensive paintings sold at our large auction houses, but many works of art are bought by tourists when they go abroad. They may want to buy a water colour of Venice to hang on their wall. What will happen if they buy a French book to read on holiday? Are they supposed to go through the red channel when they return? Are they supposed to declare it? Is the customs officer supposed to charge them a small sum in VAT and then to account to his department? While all this is going on people trying to smuggle drugs and so on will be able to steal through unsupervised. The whole thing is ludicrous and clearly has not been thought through.

Concerning our home art trade, the proposed tax will have a disastrous effect on the British art market, both on dealers and auction houses. At present, as your Lordships are aware, VAT is charged on the dealer's mark-up or on the auctioneer's commission, and not on the selling price. When the noble Viscount, Lord Eccles, was a Minister—and I am sorry that he cannot be with us tonight—and this proposal first reared its ugly head he managed to get it altered so that it was not on the selling price but on the auctioneer's commission or the dealer's mark-up, and that has been accepted by the trade.

As we all know, prices today for many works of art are extremely high, as there is a world demand. Fifteen per cent. on an auction selling price of £1 million or more is a pretty hefty sum. Why should buyers come to London to pay this? They will not, of course, and the major auction sales will be held in future in New York, Geneva or Hong Kong. This has already happened with the Brussels art market, which accepted this proposal some years ago. This would be catastrophic for London, which is an even bigger art market and is a world art centre, and would be a serious loss of invisible earnings to this country.

A further disadvantage would be that our museums and private collectors here would not be able to compete with foreign buyers, who would not be liable to VAT and would have a 15 per cent. advantage at any auction. This of course would result in the further loss of our heritage overseas. As the noble Lord, Lord Fanshawe, said, I understand that VAT is a fiscal matter. I believe, too, that unanimity among member states is required under Article 99 of the treaty. I too ask the noble Lord, Lord Beaverbrook, if he will confirm this. If it is so, as I believe it is, there therefore seems no reason why the Government should not object, and I hope that they will show great resolution over this ill-founded proposal.

8.50 p.m.

Lord Charteris of Amisfield

My Lords, perhaps I may first add my congratulations to those of the noble Lord, Lord Strabolgi, to the noble Lord, Lord Poltimore, for his admirable and extremely well-informed maiden speech, which was most enjoyable.

As I understand the position, the United Kingdom is being required to alter its existing régime for VAT on works of art for the sake of harmonisation with the other countries in the Community. The concept of harmony is indeed beautiful, but to harmonise when it is clearly against one's interests to do so is another story. Your Lordships may remember from your youth the story of Struwwelpeter and the long-legged scissor man. It seems to me that that is a story which might apply to harmonisation. It is like having all your fingers chopped to the same size for the sake of tidiness.

Everything that there is to be said against this regulation has already been said better than I can say it, but I have been specifically asked to speak by my friend and colleague Professor Brian Morris of the Museums and Galleries Commission. He and I, as Chairman of the National Heritage Memorial Fund, both believe that the imposition of this VAT directive will have very unfortunate results. As has been said, saleroom prices will rise by 14 per cent. to United Kingdom purchasers, who will thus be at a disadvantage compared with overseas buyers. This will make it increasingly difficult for works of art to be acquired by museums and galleries and for agencies such as the National Heritage Memorial Fund to prevent the export of works of art which are of importance to the heritage.

Acquisition grants available to museums and galleries are, sadly, low in relation to the escalating prices in the salerooms. The added burden of 15 per cent. will make matters even worse. As has been said already this evening, if that happens, London will cease to be the premier centre of the art market, which will most likely move to New York. For many reasons, that will be a great pity. At present, museum directors quickly get to know what is coming up for auction in the London salerooms. They can easily arrange to view an item that they need for their own collection and to bid for it. If New York instead of London becomes the centre of the art trade they will not know nearly so easily what is coming up for sale and, if they do, will not be able to afford the air fare to view it—and if they paid the air fare they would probably not be able to afford to buy the item!

The point that Professor Morris particularly asked me to make is that it will not affect only the national museums. Last year, through its local museum purchase grant, the Museums and Galleries Commission helped provincial museums to buy no fewer than 585 items for their collections, many in the open market. The National Heritage Memorial Fund was involved in quite a number of those purchases and also helped with others. There will be a temptation for owners of heritage property to sell abroad rather than in London. That, I believe, will put a great strain on the export control system.

Apart from those considerations, the imposition of this directive will have a grave and depressing effect on all museums and galleries which are doing everything they can, under difficult financial circumstances, to keep heritage items in this country. This will be particularly regrettable at a time when they are doing so much more to mobilise private money. They are doing this with the inspired support of the Minister for the Arts, whose department has introduced new schemes such as the business sponsorship incentive scheme. Therefore, I very much hope that Her Majesty's Government will decline to accept these EC proposals and, by doing so, bring much comfort and encouragement to all who are concerned with the preservation and augmentation of the nation's heritage.

8.55 p.m.

Lord Diamond

My Lords, I hope your Lordships will be good enough to allow me to say a few words at this appropriate break point, for reasons which I shall explain in a moment. However, perhaps I may first say how grateful I am—and, from what has been said, I am sure is the whole House—to the noble Lord, Lord Poltimore, for his very informed speech. On such an issue—if I may be so bold as to say this to him—it is of more than usual importance that someone so well versed in the practice of what we are discussing should come to the Chamber and, so to speak, give evidence on what really goes on.

It is very easy in this sphere of taxation to do enormous damage unintentionally, with the best will in the world. This is a very sensitive market and I suggest to the Government that they should proceed in a very sensitive way.

The reason why I sought this opportunity of addressing your Lordships is because I wanted to make quite clear to your Lordships' House that we on these Benches—the Social Democrats and the Liberals—are strongly in favour of, and support everything that the noble Lord, Lord Fanshawe, and others have said. I say that to make it quite clear, as the noble Lord anticipated, that those views are expressed from all sides of the House. It is now complete, with Cross-Benches, both Opposition parties and Conservative Back-Benches. I am sure that the Government will take that unanimous point of view well into account.

This is a very complex issue. One could take almost hours to go fully into all the complex detail. However, your Lordships will be glad to hear that I suggest there is no reason for that because the issues are really very plain. The issue is not one of harmonisation, with respect to all those who have cast doubts on that. Harmonisation is a good proposition and there is no earthly reason why we should not harmonise in the Community on the basis of what has been shown to work, and work very well, in this country. In my view, harmonisation is not the issue. It is the simple issue—and the noble Lord, Lord Fanshawe, put it very well indeed—of whether a most important market stays in London, and therefore in the Community, and benefits London and the Community, or whether it goes outside the Community probably to New York or, more likely, mainly to New York and partly to Geneva. That is the issue we are discussing tonight.

What are the arguments against it? What are the arguments in favour of doing what the Commission suggests? I do not believe that there is a revenue argument. Of course, without access to all the statistics and estimates made by the Inland Revenue I am not able to assert this; but my feeling is that the damage caused by this directive will in the long run more than outweigh the extra revenue which would be obtained. Of course that is an issue which every Treasury Minister has to consider. Noble Lords in this House have been through the same process. Every government must consider, at Budget time, when proposing and suggesting to the other place that certain taxes should be altered, how much it will affect the situation in the long run.

I should be quite surprised if the Government can say that they have worked out the estimates with great care, with all the knowledge that they have behind them, and have come to the conclusion that, in the long run, there is a great deal more revenue to be gained than lost by carrying out what is proposed in the directive. Therefore I hope very much that the Government will listen to the views that have been expressed on all sides of the House and really endeavour to harmonise on the basis of the proven practice which we have had for some considerable time in this country. It always raises a question-mark in my mind when there is a proposal to move forward in taxation in a particular form and a particular way which has to depend on pretending that the law is not what it is. One should always say to oneself, "Wait a bit! Is this the proper way to proceed?"

Here we have a proposal which depends on the assumption that an agent is a principal. I am no lawyer but it seems to me that there can be no simpler state of the law than the difference between a person who is an agent and a person who is a principal; but in order for this measure to work it is assumed to be deemed that the agent is the principal and therefore he is deemed to buy and sell goods instead of merely handling them and never takes on the ownership of them at all. That can only be justified, as I say, by the pretence that the agent in question is the principal. One should always hesitate when a suggestion of that kind is put before one which depends upon going along the road that is marked "Danger. Do not proceed this way unless you jolly well have to".

So for those reasons, and all the reasons that have been put before your Lordships with such clarity and forcefulness, I hope that the views of the Committee of your Lordships' House which were expressed in its report published in June 1978 will still prevail. They read as follows: For all these reasons"— and the Committee have listed the reasons— the Committee conclude that the Commission should be asked to reconsider its position, and to seek ways of harmonising in this instance Community practice on the lines of the prevailing system in the United Kingdom". That is why we find that good Europeans like the noble Lord, Lord Fanshawe, whom, if I may say so, I have known for years as a good European, and others as well as myself are all saying the same thing: there is nothing inconsistent with our European approach and with the desire that the trade should be kept where it properly belongs, which is in London, in the Community.

9.3 p.m.

Baroness Birk

My Lords, we are all extremely grateful to the noble Lord, Lord Fanshawe, for raising this matter tonight. Perhaps I may also add my congratulations to the noble Lord, Lord Poltimore, on his excellent and knowledgeable speech, which I think he found as enjoyable to make as we did to hear.

When notice of this debate appeared on the Order Paper and I started looking into the question, what struck me was the way in which this subject was described on the document that recorded the Select Committee's work. First, in bold letters appears "VAT on Second-Hand Goods", and then we read: Draft directive on a common system of value added tax to be applied to works of art, collectors' items, antiques and used goods". Somebody, somewhere, either has a tremendous sense of humour or is not really sure what we are talking about, because while there may be some reason—though I do not say that there is necessarily—for arguing a different case for a second-hand 'fridge, there is certainly not the same case to be made when talking about works of art and antiques.

The noble Lord, Lord Fanshawe, pointed out the importance of the art industry to our country and to Europe, so I shall not go over the same ground again. As I understand it, the draft directive comes under Article 99 which requires a unanimous decision. The proposal is now before the Council's working party, and I hope for some clarification on this point from the Minister when he replies, because there have been different ideas put forward in various newspaper reports from which noble Lords have quoted. As this directive comes under Article 99—and it is not for instance like air transport matters where rules have to be enacted by a certain date—it is my understanding that this matter could not find its way very easily to the European Court, and that in the end it will be a matter for the Ministers of this country to hold out and, if there is a difference of opinion, for the question to be resolved within the Cabinet. I think it is extremely important that we should have some very clear answers to this question.

I should like to add some questions so that the Minister has them before him now. It will also give him a chance to obtain some of the answers if they are not immediately at his fingertips. Do the Government intend to use their veto? I am not talking just about the statement made by the Minister for the Arts, which was most felicitous and encouraging, but which, to be perfectly honest, is not good enough for the matters that we are discussing tonight. If they are, then the Government have to make it quite clear that they will use their veto in order to have sufficient clout. Then if the Government do use their veto, what are the next steps? Ministers may disagree. Here I am thinking that perhaps the Chancellor of the Exchequer may not take the same line as the Minister for the Arts, and it has also been pointed out by other noble Lords that our Commissioner in Europe (who is engaged on behalf of the EC and not this country) takes a view which sounds as though it may be very different from that taken by all noble Lords who have spoken in this debate on this question of harmonisation. Like other noble Lords who have spoken, I have always been in favour of entry into Europe right from the early days.

My view has always been that we should have been in Europe many years before we were. It would be wrong for anyone—I do not mean here—to make out that there is anything anti-European in what is being said tonight, because there is not. A great deal has been said about the commercial side of this matter and the effect that there will be on dealers and auction houses. I should like to underline what has been said about the cultural and educational side and how the proposal will affect our museums and galleries if by any mischance—it could be a mischance—it gets through.

As we know, our galleries and museums depend to a great extent on benefactors. They are encouraged by the Government. Private collectors have given 80 per cent. of the National Gallery collection. As my noble friend Lord Strabolgi pointed out, benefactors make small contributions as well as large.

We know that the National Art Collections Fund depends upon the money which is contributed to it. It buys the picture or object and under this directive it will have to pay 15 per cent. VAT. The noble Lord, Lord Fanshawe, asked the Minister a question about this, but, as I understand it, it is almost a rolling 15 per cent. which will be imposed every time the picture or object is sold, whether or not it comes into this country.

The British Museum has been mentioned. I am a member of the council of the British Museum Society. We try to make gifts to the museum. When we make purchases ourselves I believe that at the moment we can recover the 15 per cent. tax because we are a registered charity. I am not sure whether that will apply if the directive comes into force. I should like to know the answer.

Another way we help the museum is by contributing money so that it can buy an expensive or much wanted object or picture. In such cases we shall have to find more money, which is unlikely because we are a small society, or the museum will have to make up the financial gap. If the directive comes into force museums and galleries will not be able to make acquisitions. They are not treated generously by governments in their arts allocations. The increase to museums and galleries announced the other day was 3.75 per cent. When they have paid increased wages, they will be denuded of the means to buy pictures and sculptures.

There is another point. Part of the work of curators is educational, for them and for the people whom they serve. That depends on their having access to works of art from which they can choose pieces to buy for their museums. This proposal will almost completely dry up that outlet. If the Government do not want to see our culture shrink almost to a pinhead they will have to make up the difference between what the museums and galleries can afford and will have to pay if they are not to be put into a straitjacket with regard to new purchases.

The directive will have not just a commercial, material effect; it will alter people's attitudes towards collecting and donating to museums and galleries. As my noble friend pointed out, people have great pride and take pleasure in thinking that they can donate or leave something to a museum. It may not be worth hundreds of thousands of pounds; it may be worth only a fairly small amount. They will not be encour- aged to do that. People will have a different attitude. They will shut their minds and not want to do that.

That could undermine our position as the centre of the art trade. From the point of view of young people, this would be a tremendous educational loss. There would gradually be less to see in the galleries and museums. I am not saying that this would happen overnight. There are, after all, stocks. But instead of art being a lively, spirited and growing occupation, it would tend to taper out. This would not entirely eliminate, but would certainly bring about shrinkage of, the considerable education schemes and plans for young people that constitute one of the objectives of our museums and galleries today. It would make this function extremely difficult.

As we are all at one in this debate, our discussion may not have proved all that interesting but at least there has been unanimity of view. No one has said that we are talking nonsense and that the proposal is absolutely essential to our continued relationship with Europe. Nothing along those lines has been heard. We look forward now to hearing the answers of the Minister to the various questions that have been put. We want to be clear on events up to date, what options are open to us and what the future may hold.

9.15 p.m.

Lord Beaverbrook

My Lords, we have had a most interesting debate, and I should like to thank those who have taken part, especially my noble friend Lord Poltimore who made an excellent maiden speech. I am sure that I speak for all your Lordships when I say that we look forward to hearing him in the future. We welcome particularly his considerable knowledge of fine art.

The House is also grateful to my noble friend Lord Fanshawe of Richmond for raising today the important issue contained in the Commission's proposals in the draft seventh and eighteenth VAT directives. The absence of representations in the House today in support of the Commission's proposals, which bear among other things on the taxation of all secondhand goods, including works of art, antiques and collectors' items, is, to say the least, a strong indication in itself that the proposals might be detrimental to the interests of the British art market.

Perhaps I may say a word about the background to this issue. The sixth VAT directive, which is the basis of Community VAT law, requires among other things that the Council should adopt a harmonised system for taxing secondhand goods, including works of art. The Commission first presented its proposal for the harmonised system in 1978 in the form of a draft seventh directive, modifying it in 1979. Until the directive is unanimously agreed by the Council of Ministers, member states may retain their existing schemes. The special scheme for works of art in the United Kingdom includes exemption at importation.

In a similar way, the sixth VAT directive provides for temporary derogations which the Commission's proposals in the draft eighteenth directive seek to eliminate. In that draft directive, as in the draft seventh directive, proposals are made which bear on the tax treatment of agents, who, in many other member states at present and in the Commission's proposals, are frequently seen as principals in taxation matters. The obvious example in this aspect is the position of auctioneers, including auctioneers who handle works of art.

The draft eighteenth directive is relatively new, and initial discussions in Brussels have not yet focused on the proposals affecting agents. On the other hand, the draft seventh directive has clearly been the subject of considerable discussion over a number of years. The fact that little progress has been made is an indication of the difficulties which member states have with the proposals. The key factors for the United Kingdom lie in three areas: first, the fundamental nature of the Community scheme for taxing secondhand goods; secondly, the taxation status of agents; and thirdly, the treatment of works of art, antiques and collectors' items, particularly at importation.

I will not dwell long on the nature of the proposed Community scheme. Suffice it to say here that the proposal would not affect the amount of tax chargeable on an internal transaction. Minor technical difficulties lie in the fact that, at exportation, residual tax in an item—that is, tax remaining, in taxation parlance, "unconsumed"—is not removed in the United Kingdom scheme which could, if not recognised, lead to double taxation in an importing member state. But as I say, these are minor difficulties. Similarly, although the importance of this aspect to the fine arts trade is fully recognised, I do not intend to spend much time on the question of agents.

The principal concern to the British art market, as demonstrated in your Lordships' House today, lies in the question whether or not works of art, antiques and collectors' items should be subject to taxation upon importation. As I have said, as part of the existing scheme for secondhand goods in the United Kingdom, we do not subject such items to import VAT. The thought that this tax exemption might be lost had led to claims that the flourishing London art market would be irrevocably harmed, to the detriment not just of the fine arts trade, but also to United Kingdom and Community cultural interests. Let me therefore turn to the nature of the British art market.

The centres of the world are market are few. Pre-eminent among them are New York, Geneva and, of course, London. Indeed, London may well be the foremost market attracting the finest examples of fine arts for sale, whether to British or to foreign collectors. The reasons why London has survived while so many have failed lie in its long-standing reputation for expertise and reliability in identifying important works of art; and in marketing those products to the best advantage. Buyers and sellers alike are attracted to London: the sellers in the knowledge that the London market will attract those willing to pay the full market price, and the buyers in the knowledge that the product will be what it is held out to be. Both parties can rely on the service and fair dealing of the auction houses.

Those then are the primary trading strengths of the British art market. But, undeniably, there is also a fiscal reason why the London art market has flourished, particularly in relation to other centres in the Community. This has to be so, because if the market sees the loss of a fiscal provision—the import exemption—as detrimental to its interest, then the presence of it must have been an advantage.

The essence of the case being made on behalf of the British art market is that, notwithstanding the fact that a large proportion of imported items are, upon sale at auction, subsequently re-exported without bearing VAT, the fact that an item may remain in the United Kingdom bearing tax under the proposals in the seventh directive, will be sufficient to deter and deflect the would-be seller from sending the item to London in the first place.

As several of your Lordships have pointed out, the seller could instead select other market centres, such as Geneva or New York, where taxation upon importation would not act as a deterrent. This is so because the seller would assume that the liability to pay VAT on an item sold for retention in the United Kingdom would depress the bid which the home buyer could make. The argument concludes that not even the exemplary standing of the British art market could withstand this perceived detriment to our market.

Not unnaturally, the representatives of the fine arts trade are concerned to protect their pre-eminence in the world market. But their motives are not entirely self-protectionist. Any loss to the United Kingdom market would be a loss to the Community, as trade would be driven to New York, Geneva or other centres outside the Community. Despite the mobility of buyers in this sector, the tendency would be to diminish the opportunities to purchase fine arts goods, and the loss in cultural terms to the Community would follow. With this in mind, and without fear of competition within the Community, the Fine Arts VAT Working Party has proposed that the exemption at importation should be available to all member states. I have to say, however, that other member states do not at present seem inclined to support that suggestion.

The House need hardly be reminded that the Government will continue to take account of trade interests and representations in responding to all Community proposals. This principle will be observed in relation to discussions on the seventh and eighteenth VAT directives as in all others. I would observe, however, that the fine arts trade would do well to put flesh on the bones of its arguments by submitting to officials a promised paper commissioned to analyse in detail the prospective economic impact of the Commission's proposals. The paper has been slow to emerge, and its absence does not assist in preparing and presenting a fully effective response to the Commission's proposals. It is absolutely essential to shed light as well as heat on the issue.

My noble friend Lord Fanshawe of Richmond has raised two interesting points. On the question of the Single European Act, I can assure my noble friend that the Act does not affect the need for unanimity—that is, the unanimous agreement of the member states on fiscal matters.

The noble Lord and the noble Baroness, Lady Birk, raised the question of Article 99. So far as the prospect of the Commission going to the European Court of Justice is concerned, there is no question of the United Kingdom being taken to the court for failure to agree to harmonisation. Article 99 of the Treaty of Rome gives power to the Council to adopt legislation to the extent necessary to ensure the establishment and functioning of the internal market. Once such legislation is adopted—and it needs unanimous agreement—any member state alleged not to be complying with it can be taken to the European Court, but not for refusing to agree to adopt a proposal.

The noble Lord, Lord Strabolgi, brought to our attention several important points. On his point on the taxation of books, I can tell him that the present zero rating of books in the United Kingdom will not be affected by the proposals of the draft seventh or eighteenth VAT directives, nor are there any other proposals which would affect the zero rating of books. The noble Lord also mentioned the question of the cascade effect, as did my noble friend Lord Fanshawe. I can assure the noble Lords that there will be no question under these directives of double taxation. The draft seventh VAT directive contains specific provisions to avoid this possibility.

The noble Lord, Lord Strabolgi, made a point on private importation of items such as water colours that have been bought on holiday. Under the seventh VAT directive the present limited relief for private importation of works would in fact be abolished.

The noble Lord, Lord Diamond, raised a point as to whether the revenue collected under the proposals would in fact not be outweighed by damage done in the long run. We are awaiting economic analysis from the Fine Arts VAT Working Party, and it is difficult to calculate without this information. Nevertheless, we recognise that this argument has merit.

The noble Baroness, Lady Birk, brought up the matter of whether the British Cabinet could use its so-called veto to block progress. At this stage there would be no point in expressing a veto before we have had the opportunity to put fully and effectively this country's view, and other member states might yet well be won over. On the noble Baroness's point about the British Museum getting its VAT returned, this is a complicated matter and I shall write to the noble Baroness on the point.

Noble Lords have raised other questions. In order not to delay the House tonight I hope that noble Lords concerned will forgive me if I write to them on their particular points. In closing, I can give the assurance that no decisions on these matters are imminent in Europe. Indeed, I again emphasise that without the unanimous agreement of Ministers in Council no value added tax directive can emerge. We would hope to convince our Community partners of the force of our arguments in agreeing finally a scheme which served the dual purpose of satisfying harmonisation goals with the preservation of a major fine arts market, to strengthen rather than diminish cultural aspirations of the Community as a whole.

Baroness Birk

My Lords, before the noble Lord sits down may I put one point to him? He said several times that the Government were awaiting the report of the Working Party. That worries me a little. The effect of this directive going through, if it does, is much wider than concerns just the fine arts dealers in London should have thought also that the Government would have ways of getting this information for themselves. This makes me a little uneasy.

Lord Beaverbrook

My Lords, these directives apply to secondhand goods in their entirety, not just the question of works of art, collectors' items. The Government see it necessary for the fine arts market industry in London to make available, as soon as possible, its own figures so that the Government can have at their disposal the best information when going to make our country's proposals to our partners in the Community.