§ 8.12 p.m.
§ Viscount Blakenham rose to ask Her Majesty's Government what they expect the combined effect of the European directive harmonising VAT and the proposed directive on the harmonisation of artists' resale rights to be on the United Kingdom art market.
§ The noble Viscount said: My Lords, the Question before the House was originally tabled by my noble friend Lady Rawlings. She has asked me to take her place this evening because unfortunately she is unwell and cannot attend. The House will be pleased to hear that she is making a good recovery. The views that I put forward are my own but I hope they will reflect the spirit of what she might have said.
§ First, I declare an interest in that I am a director of Sotheby's Holdings Inc. which is the US parent company of Sotheby's in London. The intention behind the Question is to air the problems that are likely to face the art market in the United Kingdom and the rest of Europe if harmonisation measures are pursued in the manner as currently proposed. The art market in the European Union is estimated—it can only be an estimate—to be worth approximately £3.5 billion to £4 billion a year. Of that, approximately £2 billion of sales take place within the United Kingdom. The UK therefore is by far the largest individual market and on it depend jobs, foreign exchange and, to a lesser extent, tourism.
§ The market has been built up painstakingly over the years, and it is one that can be quickly destroyed because art objects are international and highly portable, valuable and sensitive to the terms and conditions of the market in which they are sold. The seller has a choice. The levelling of the playing fields of the European Union—if this means harmonising them at rates higher than elsewhere in the world—will result in the owners of valuable art works selling those objects elsewhere.
1161 This could be described as cutting off one's nose to spite one's face. It is simply short-sighted. One ends up requiring spectacles without a nose on which to place them.
§ There are signs that since the imposition of value added tax parts of the art market are already beginning to shift from London to New York. Currently, through derogation, London is paying less VAT than other European countries, but if the logic of harmonisation is pursued the likelihood is that that situation will not persist beyond 1998. The proposed directive on droit de suite will worsen the position.
§ What can be done? As a first step, I believe that the European Commission should be forced fully to appreciate the scale of the problem and a serious study of the consequences of the proposed measures should be undertaken, as has been promised. The ideal outcome would be a decision to turn back the clock and remove value added tax which would otherwise discourage works of art from entering the country from overseas and encourage UK and other European owners of art to sell outside the Union, effectively eliminating our source of supply.
§ If our art market does not have access to the tools it cannot do the job. If total abolition is not practical at least the European playing fields should in due course be harmonised at the lowest possible level rather than the highest, which tends to happen in such matters. Exchequers would have little to lose as they could take their tax share in the normal way out of the additional annual profits of the commercial enterprises concerned.
§ Droit de suite is more complicated. I have sympathy for the principle, particularly if it can be administered more cheaply and effectively than it is now in the countries where it operates. Like other forms of copyright, I believe that the approach to the problem should be an international rather than a European Union issue. The situation is currently covered by the Berne Convention to the extent that on the one hand the convention gives strong encouragement to it but on the other states that it should be left to individual national signatories to determine how and whether it should be applied. Pressure should be exerted for an international solution; otherwise, once again, works of art will tend to gravitate towards markets where this does not apply. Artists and their families will therefore be deprived of any benefit.
§ At the beginning I declared my connection with Sotheby's. I conclude by pointing out that it is not the international auction houses that will suffer most if the worst happens. Art that does not come to Britain can be sold through their bases in New York, Switzerland or elsewhere. It is the art market of the European Union that will be the big loser, in particular the United Kingdom art market because of its size and importance. I believe that Her Majesty's Government are fully aware of the seriousness of the problem and are doing all that they can to influence European colleagues. I am also clear that the future of our growing market is dependent on their success.
§ 8.20 p.m.1162
§ Lord Strabolgi
My Lords, I am sure that we are grateful to the noble Viscount for tabling this Question to the Government and for initiating this debate. What the Commission is proposing concerning droit de suite and VAT will have a drastic effect on the sales of 20th century art not just in London, which is the most important European international centre, but on the whole of the EU. The proposal that every time a contemporary work of art is sold a certain percentage should go to the artist is superficially attractive, with the idea that young artists will be helped at the outset of their careers, but that will not work out in practice.
The percentage is levied on the resale, not on the initial sale. A young artist usually sells at, say, £1,000 to £2,000 a work, with a resale value of about half that if it is sold fairly quickly. Even at £1,000 all he will receive at 4 per cent. will be £40, less the cost of collection, which is 40 per cent., thus leaving some £25 in all.
Those who will benefit will be the heirs of the early 20th century painters of the Ecole de Paris, whose paintings fetch enormous sums at auction making their heirs, who are already extremely rich, even richer. The tax is on a sliding scale, starting at 2 per cent. for the larger sums, thus the droit de suite on a £1 million painting, which is not unusual these days, will be £20,000 to the heirs. That has to be paid every time a work is sold for the whole of the 70-year copyright period.
I believe that in France 75 per cent. of the suite collected went to just six families—the heirs of the great painters of the Ecole de Paris of the earlier years of this century. They are the people who will benefit so enormously, not the poor young artist. It may be asked: does it matter? Well it does matter, because of the effect on the market, particularly the London market.
The noble Viscount said that London is the leading centre for the market for 20th century works of art, mainly because of our favourable rates. If we are obliged to levy droit de suite in addition to the other charges and VAT, the market will move elsewhere outside the EU to New York, Geneva or Tokyo. The proportion of sales brought to London from outside the EU is, I understand, 45 per cent. Many of those works go out again after the sale, back to New York, Geneva or Tokyo, thus earning valuable foreign currency.
The cost of transport to the USA, for example, is less, I understand, than the payment of droit de suite on large sales. London is the only EU capital where that happens. In Paris, for example, at Drouot (the French auction house) the sales, including the top sales, that take place at the Hotel George V, are almost entirely of the French domestic heritage that has remained in France, and are not international in this sense.
Top contemporary works from American collections are sold either in New York or they come to London. They do not go to Paris or to other western European capitals. If London loses out, the loss will be to the EU as a whole, because American collectors will cease to consign here, and Swiss collectors will send their paintings to New York.
1163 Europe should look therefore at its competitive position with the rest of the world. The proposal is that droit de suite should be levied on all sales of contemporary works, not just auction sales. That will affect every art dealer, both large and small, throughout the country, who will have to account for every transaction. The collection costs will be 40 per cent., which is a very high proportion, and I suspect that the collection agencies in Europe have a large vested interest which they would like to see extended to this country.
The Commissaires-Priseurs, who are the officially accredited auctioneers in France, have suggested that the lowest rate of droit de suite should be reduced from 2 per cent. to 1 per cent., and that that should be paid only to heirs who are in the direct line, or to close relatives such as spouses. That compromise would at least limit the amount on the larger sales and their range. I shall be interested to hear what the Government have to say about that when the noble and learned Lord replies.
I understand that the directive can be passed by qualified majority voting. On the other hand, it is held—the noble Viscount mentioned this—that if any member state considers that it is suffering because it has droit de suite, it could abolish it under the terms of the Berne Convention. I should be grateful if the noble and learned Lord the Minister would clarify the position when he comes to reply. I hope that the Government continue to stand firm, as they stood firm last April when we had Questions on this subject, against these well-meaning but misguided proposals.
§ 8.26 p.m.
§ Lord Freyberg
My Lords, I, too, should like to add my thanks to the noble Viscount for giving us the opportunity tonight to debate these two important issues. What is worrying about these two measures is that they ignore, and perhaps even penalise the UK's pre-eminence as an art market. Alone in the European Union, the UK has a fully international art market—accounting for 60 per cent. to 70 per cent. of the total EU art market, with an annual turnover of more than £2 billion. This will be seriously threatened by the imposition of restrictive practices already long operating in some other European countries in which a quite different, more local market exists, and which have, over the past two decades, shown no growth.
These extra charges are not exacted in other major international art centres outside the EU such as New York and Switzerland and, if the UK starts to apply them, we shall lose our competitive edge and share in the market. It is to New York and Switzerland rather than anywhere in the EU that the market will move.
I should like to register my concern at the disturbing reduction in the number of works of art imported for sale into this country from outside the EU since the imposition of the temporary 2.5 per cent. VAT levy on the dealer's commission.
1164 The levy came into effect on 1st June 1995. A year later the DTI reported that imports of works of art from non-EU countries had fallen by 17 per cent. As Laura Suffield wrote in the European:If this were part of a general slump, exports would be similarly down. but they are not.As she went on to say, the levy makes it increasingly likely that owners of works of art in Switzerland and the United States—both of which have no import tax—will from now on send their possessions for sale outside the United Kingdom. The major auction houses will simply relocate sales at the top end of the market and London will lose to New York.
As a higher rate of 5 per cent. has been suggested, it is extremely important that the Government realise the detrimental effect even the lower rate has had and will continue to have on such an important market. The effect is so serious that it threatens to undermine the UK's position as Europe's leading art market. I am anxious that the Government should impress on our fellow members in the EU that a further increase to 5 per cent. will be disastrous.
The European Commission agreed, on 10th February 1994, to re-examine the directive's impact on the competitiveness of the Community art market and to report those conclusions to the EU Council by 31st December 1998. I urge the Government to take steps in this direction and seek to minimise, if not abolish, the VAT levy on works of art, collectors' items and antiques. It serves no benefit, but makes us uncompetitive with the rest of the world and a great many jobs depend on it.
Before talking about the proposed artists' resale rights, I should like to declare an interest as a sculptor and a potential beneficiary, provided, of course, that I am able to re-sell works above 1,000 ecu—currently approximately £757. The proposal for a directive to harmonise national regimes over artists' resale rights was put forward on 13th March 1995 by the European Commission. Resale rights, or droit de suite, entitle the author of a work of art (or his heirs) to receive a percentage of the price of a work when it is resold by public auction or through an agent.
The EU wants Britain to impose this levy to eliminate differences or distortions in resale laws throughout the European Union which currently exist at different levels in 11 out of 15 countries, although only eight enforce them. Only the UK, Ireland, Austria and the Netherlands have no form of resale rights.
The proposed measure will do little to help struggling artists, but will add substantial sums to the coffers of the well-established big league or their estate. Furthermore, less established artists will be seriously disadvantaged by the diminution of the art market in the UK, as influential dealers will be encouraged to move their business out of Britain and out of the European Union to less financially punitive markets such as New York.
The levy proposed is between 2 and 4 per cent. If a painting costs £100,000 a 3 per cent. levy would add £3,000 to the price. The cost of shipping the painting to New York would be in the region of £500, but could 1165 often be reduced by sending a quantity of lots in a container. What dealer could resist choosing the latter alternative? Thus, non-European Union sellers will be discouraged from sending their top works for sale to the UK (or anywhere else in the EU) while EU sellers will themselves benefit from exporting their works for sale outside the Union.
The proposed directive affects the contemporary art market, involving works by artists whose death occurred after 1926. The estimated 1995 figure of such works sold in the UK totals some 395 million ecu (over £300 million), of which over 50 per cent. of the vendors were from outside the EU but had elected to sell in Britain (usually in London).
A recent British Government survey estimated that if the proposed directive is agreed in its present form there would be a loss of revenue of £68 million, leading to job losses of up to 5,000 for which there would be no compensation. There can be no justification for such deliberate damage, which would result in no gain either for Britain or for the EU art market.
Moreover, the charge would benefit only the top artists and their estates. A painting resold even for £1,000 would make its artist a mere £40. A huge number of resales would have to result to improve a struggling artist's livelihood. Collection charges alone would be likely to reduce this substantially. When Sweden introduced resale rights last year, some 68 per cent. was swallowed up in collection costs; in Denmark the charges are 40 per cent. Professor John Merryman of Stanford University recently estimated that out of the thousands of artists active in the United States, only 1 per cent. are active in the resale market; that is, would be eligible for resale rights.
At first sight, the artist's resale rights appear to benefit artists and are supported by some artists' groups in the UK and throughout Europe. But even they acknowledge that the European market will be disadvantaged as long as the US and Switzerland do not impose similar charges. One group, the National Artists Association, naively states that:implementation must be followed up by implementation in the US and elsewhere".The extra cost to people who buy works of art—namely, collectors, museums and the art trade—will ensure that they buy less than previously. And most works will remain a once only sale, which is why a thriving art market is so important. This is not an adequate reason for destroying just such a market.
Then there are the practical difficulties. European countries which have introduced some form of artists' levy have found that collection costs are high. In France, one of the main collecting agencies, SPA-DEM, has filed for bankruptcy as the amount collected was insufficient to meet its own running costs. As currently drafted, the directive states that the artist should receive a percentage of every transaction even if the work sells at a loss.
Whether there is a moral case for artists' resale rights is more debatable. I was amused by the comments of Patrick Cox MEP to the EU Commission a few months 1166 ago. He maintained that the idea is illogical: why should not an architect get a reward every time a house he had designed changed hands? And, as for the EU's assurance that the market in living artists would not flee from Europe, he said:It's a bit like saying that Newton's Law of Gravity means that in Europe the apple drops, while in the rest of the world it goes up".London is Europe's major representative in the world art market, equalled only by New York. It has taken centuries to build up, but will disappear quickly if it operates on disadvantageous terms. And once lost it will be extremely difficult to win back. We want it to stay strong and attract buyers to London and to Europe as a whole. The directive must be reconsidered.
§ 8.34 p.m.
§ Lord Hindlip
My Lords, I am extremely grateful to my noble friend Lord Blakenham for tabling this Question, in which I must declare an interest as chairman of Christie's. Somewhat naturally, my own livelihood depends on the London art market, as does that of the thousand people my firm employs in Great Britain. I have estimated that some 20,000 others are directly employed in the British art market. I shall be interested to hear any reassurance that the Minister can give us, but it is a sad fact that the British art market will suffer hugely from VAT and droit de suite. I am afraid that that illustrates the limitations of ministerial powers when dealing with European directives.
I joined Christie's 34 years ago and have seen the London art market rise to pre-eminence, leaving both Paris and New York behind, and sadly fall back again, despite the dominance in the world market of two firms; one is my own, which is still British, and the other is our rivals, which is now American with a strong London presence.
The British art market rose in the last century and remained dominant well into the 1970s. That occurred for two reasons: its efficiency and its freedom. It had freedom from both import taxes and bureaucratic restrictions which were afforded it by a succession of sensible governments. That freedom has been eroded since Britain joined the EC.
In 1973 we at Christie's held an exhibition which was opened by the then Prime Minister, my right honourable friend Sir Edward Heath, who spoke of the British art market as having become,the main marketplace for art objects not only from Europe but from all over the world".The late Lord Goodman, in his introduction to a catalogue, wrote of London's unchallenged position in the art market of the world, achieved by commercial acumen, scholarship and integrity that had inspired the confidence of the world for generations. Little could he have known that the very institution which was being celebrated, the EC, would be so destructive.
However, Mr. Heath's Government reassured us and to begin with all went well. We negotiated that VAT would be payable only on the auctioneers' commission and on dealers' profits, and, above all, that works of art could enter Britain free of VAT on import. Then, after 15 years of discussion, came the harmonisation of VAT.
1167 The Government were forced to accept VAT on works of art imported from outside the EU. Thanks at present to a compromise arrangement, as mentioned by the noble Lords, Lord Strabolgi and Lord Freyberg, it is only 2.5 per cent. but is set to rise in 1999 to a minimum of 5 per cent. I have in my hand Commission Document 328.96 from Brussels, dated 10th July 1996. Page 30 sets out a proposal to increase the minimum rate to 15 per cent. But even at the present rate there are signs that VAT is undermining London's ability to attract business from overseas. The trade statistics for 1995 show a decline in imports from outside the EU, the first time that that has happened in a period when trade as a whole has risen.
London is also threatened by droit de suite, as so eloquently pointed out by the noble Lord, Lord Freyberg. That will add between 2 and 4 per cent. to the cost of selling in London for 20th century works of art. It is interesting to note that it would have affected £70 million-worth of goods which we alone sold last year, half of which come from outside the EU.
Parliament has looked at the system of artists' resale rights in the past and rejected it. It is inefficient, it is bureaucratic and again, as has been pointed out, it overwhelmingly benefits a tiny minority of well-known artists and their heirs. I should like to underline the fact that 75 per cent. of droit de suite levied in France goes to only six families; and, of course, it benefits the agencies that collect it. But it does not apply elsewhere in the world where there is an international art market. The consequences of having it here are entirely predictable: the market will simply move away.
To sustain the art market in London at its present level we need to attract some £200 million worth of business from outside the EU. Given the perception that the American market is stronger than our own, this is already difficult. However, it is not impossible; we have done it before. London as a market place has much to offer. It still has the integrity to which Lord Goodman referred. It has its language and its location. But what we cannot do is compete with a tax and droit de suite burden which will soon rise to three-and-a-half times the commission that we charge on the business we need to secure.
Let us picture the following conversation with a potential Japanese seller of a Picasso worth, say, £2 million—the bread and butter of our business. He probably knows our charges because they are published but he asks me to repeat them. I tell him that our charges are 2 per cent. and that we will charge him expenses at a further 0.5 per cent. He says, "So, I will have to pay 2.5 per cent. to sell my picture in London?" "Not quite", I have to reply, "There is the question of droit de suite". When I explain this his face clouds over and he says, "So it is 2.5 per cent. to you and 2 per cent. to the artist's heirs?" I reply, "Yes, that is right". However, I add, "If it is bought by a European, there would be another 5 per cent."—and that could be 15 per cent. I have to say that it might be bought by a European because the last expensive Picasso sold by our rivals in New York was bought by a European. He says, 1168 "That would be another 5 per cent., and what in America?" "In America, it would be 2.5 per cent". He then asks, "And nothing more?" "Nothing" I reply.
Noble Lords will see that that is the end of the discussion about sales in London with a Japanese client. It will also be the end of the London art market as we know it. I say that because, as other noble Lords have pointed out, it will not shrink by 30 per cent. or 40 per cent. because the loss of the third that comes from outside Europe will also make European sellers look elsewhere and take advantage of the larger market place in New York.
We have argued our case vigorously in Brussels. But the sad fact is that we are trying to defend something the Commission has made little attempt to understand and which does not, as the noble Lord, Lord Freyberg, pointed out, exist in other European countries. This market must look beyond the bounds of the European Union for its future success and growth. That is the nub of it. You cannot fence in and tax something like the art market. Works of art are much too easy to move and there are too many eager rivals to London and Europe generally to make the harmonisation of VAT anything other than a pyrrhic victory.
I thank the Government for their support in the past but I urge them not only to resist measures which will irreversibly damage the market but also to try to promote a proper understanding of our market both in Brussels and with other member states. An opportunity exists, albeit at the eleventh hour. The European Commission is obliged to review the effect of VAT on the art market by the end of 1998. It is surely sensible for a halt to be made on droit de suite, and any other measures that will undermine the market, until a proper and well-informed review has taken place. It may—and almost certainly will—be the last chance.
If the EU is intent on driving the art market out of Europe, the very least the Commission should do is to understand what it is destroying. At this late hour it may be possible; indeed, I hope so. We in the art trade will certainly give every assistance to the Government in their efforts to do so.
§ 8.45 p.m.
Lord GilImore of Thamesfield
My Lords, I, too, must begin by declaring an interest. I am chairman of LAPADA (the Association of Art and Antique Dealers) and that association is also a member of the newly-formed British Art Market Federation (BAMF). Self-evidently, the association and the federation have a keen interest in the two subjects under discussion tonight. I should also like to add a word or two of gratitude to the noble Viscount, Lord Blakenham, for raising the issue. At first glance it may appear to be a minor matter of small importance alongside other contentious debates on European issues which preoccupy your Lordships' House and the other place but, as has been demonstrated by other noble Lords this evening, that is not the case.
As the noble Viscount, Lord Blakenham, said, the UK market is by far the largest in Europe and, indeed, second only to that of the United States in the world.
1169 The British Art Market Federation, to which I referred, alone represents 5,000 businesses and collectively employs 20,000 people. Aside from employment and taxation, the British art market provides substantial other benefits to the British economy both through indirect employment—that is, employment of restorers, shippers, framers, insurers, valuers and so on—and through indirect earnings, for example, in the tourist and hotel business. In sum, the British art market is a large contributor to our national wealth and, more intangibly perhaps, to the quality of our life.
I shall not detain your Lordships at this late hour as other noble Lords have made many of the points that I wanted to make and, indeed, have done so more eloquently than I could. I have no wish to duplicate what has already been said. However, I strongly endorse the point made by the noble Lord, Lord Freyberg, about the British art market being truly international in character—a fact that does not apply to any of the other markets within the European Union. It is, therefore, self-evident that any changes in the regulations which would put the British art market at a disadvantage vis-a-vis its competitors, especially the United States, would jeopardise the position which, as the noble Lord, Lord Hindlip, said, has been built up over many decades, and place it in great danger.
However, the risks inherent in ill-considered tampering with the existing regulations go wider than that because, as has been pointed out, the danger does not only affect the United Kingdom. Changes in the rules will affect all members of the European Union, but because our market is the largest, ours will be the most affected. The risk that the proposed new directives will have the effect of pushing the European art and antiques market to the United States and Switzerland is not fanciful; indeed, that is what occurred in the early 1970s with the imposition of purchase tax on jewellery. Since that time, major European sales of antique jewellery have, for the most part, moved and now take place in Geneva.
I turn now to the specific details of the two proposed measures under discussion tonight. First, I shall deal briefly with VAT. The background is well known to your Lordships. Prior to 1994, the importation of works of art, antiques and certain collectors items was free of VAT. That was a fact which did much to ensure the growth of the British art market. As the noble Lord, Lord Hindlip, pointed out, under pressure from our European partners, the British Government were forced in that year to concede the principle of VAT on imports but negotiated a derogation which held the effective rate at 2.5 per cent. until 1999. At that date the level of VAT will rise, at least to 5 per cent., possibly more, unless a Commission review, scheduled for 1998, recommends otherwise. As has already been pointed out, that situation is further muddled by a new proposal for across-the-board harmonisation of VAT within the European Union. It is not clear whether the review of VAT on art and antiques would or would not be subsumed in this new proposal.
1170 The damage to the United Kingdom market, and indeed to the European market as a whole, of which, as we have heard, there is some circumstantial evidence already, will get worse unless this rise in VAT can be prevented. Vendors of art and antiques in the Union will be encouraged to make their sales, for obvious reasons, in the less onerously burdened markets of New York or Geneva. There would, in short, be an inevitable, and in my submission irrevocable, decline in the British art market. Furthermore, while it is true that for the larger auction houses it is possible to switch from the United Kingdom to, for example, New York, that possibility is open only to a few of the larger dealers.
Similar but not identical considerations apply to the second subject, the proposal to harmonise resale rights for artists throughout the Union on the basis of the droit de suite convention. Like the noble Viscount, Lord Blakenham, one can have some sympathy with the intentions which lie behind this idea. Just as 20 years ago public lending rights for authors were introduced in this country, so it is legitimate—although the issues are different—to consider ways of rewarding artists whose work passes from hand to hand, sometimes (but actually very rarely) at increasing value to the successive owners but without benefit to the artist. The problem is that this proposal to harmonise practice within the European Union is excessively unlikely to do that. The droit de suite is an international convention, not a European one. As has been pointed out, it imposes no obligations on states party to that convention and indeed allows those states which consider that their market could be damaged to abolish it or not to apply it. As the noble Lord, Lord Freyberg, has pointed out, there is a whole range of variations in the way the droit de suite is applied.
It is a messy situation. However, the Commission's proposal—this passion for harmonisation—is likely to have the same effect as those related to VAT. The Commission, for whatever reason, looks only inward, seeking to eliminate a distortion which it perceives within the European Union, ignoring, for whatever reason, that the modern art market is international. So, just as with VAT, the proposal to impose standardised resale rights throughout the Union—a levy which would then exist in the Union but not in the other markets such as New York—will simply mean that business will move away from the Union to our competitor markets.
Furthermore, the proposed system is staggeringly inefficient. I shall not repeat the points which were so eloquently made by the noble Lords, Lord Freyberg, Lord Strabolgi and Lord Hindlip, but the fact is that this droit de suite proposal cannot be said to serve the poor and struggling artist. In short, the existing practice under the droit de suite is not a significant enough distortion within the European Union to warrant this proposal for harmonisation with all its consequent dangers for the European, and particularly British, markets. If, as I believe is the case, the intention is to secure financial rewards for poorer artists, this is quite certainly not the right way to do it. Finally, the administrative costs of operating a system of this kind are grotesquely out of proportion—we have heard figures this evening—and in the end would be damaging to European artists in that 1171 the proposed measures are likely to reduce not only the number of outlets for their work but also the price paid on initial purchase.
The Government have so far been commendably robust in defending British interests on both of these issues—a fact which the British market, I know, recognises with gratitude. I hope that the Minister will be able to confirm again tonight that Her Majesty's Government will continue to stand for good sense and for the interests not only of the United Kingdom but of Europe as a whole.
§ 8.55 p.m.
§ Lord Pearson of Rannoch
My Lords, after five such erudite contributions from other speakers, there is not much more I can say about the disturbing details of these pieces of European legislation. I hope I am wrong but the situation may perhaps be more serious than some of your Lordships appear to have appreciated. I fear that the Government's room to manoeuvre may be somewhat limited.
The Question of my noble friend Lord Blakenham asks the Government what they expect the combined effect of these directives will be. From the debate so far it is hard to imagine that my noble and learned friend the Minister when he replies will say anything else than that he agrees their effect looks pretty disastrous for our art market if the directives cannot be removed. My question for him therefore, as in relation to so many other British interests which have been damaged or are threatened by European legislation, is this: given the terms of the Treaty of Rome, what can the Government do about it?
I should remind your Lordships that under that treaty we have ceded large areas of sovereignty to the qualified majority vote in Brussels. Those areas include our agriculture and fisheries, the environment, transport, European culture and everything covered by the single market which embraces our industry and commerce. I imagine—my noble and learned friend on the Front Bench may correct me if I am wrong—that since we have already signed up to the sixth VAT directive, which was supposed to take full effect from 1997, that is, next year, any derogations we may have under that directive will come to an end, at the latest, in the year 2004. So it is not easy to see how we can escape from that directive for much longer. As I recall, this would force us to impose VAT at between 15 and 25 per cent. on such items as food, public transport, books and newspapers, and children's clothes. Will my noble and learned friend tell the House whether this understanding is correct, and when the Government believe that this VAT directive will bite on our art market, and to what extent? In other words, can we escape, and if so, for how long?
I now turn to the proposed directive on artists' resale rights which I imagine is being brought as a piece of single market legislation, and is anyway subject to the qualified majority vote. Assuming this is so, it is worth recalling how the qualified majority voting system works in order to appreciate how difficult it may be to escape from this, and from so many other directives.
1172 The 15 member countries have 87 qualified majority votes between them; 62 are required to carry a motion and 26 to block one. The UK has only 10 votes and can seldom muster enough support from the other countries either to carry or to block a Commission proposal. My noble friend Lord Blakenham mentioned the Berne Convention in this respect. No doubt my noble and learned friend on the Front Bench will tell us if there is any comfort in that. If so, perhaps this directive will be a happy exception. Perhaps my noble and learned friend can tell us that we shall get enough support to block this one, which would of course be good news. But as I understand it we would still be left with the VAT problem, which looks more serious to an outsider.
Listening to your Lordships this evening, I once again could not help wondering whether our membership of the European Union is really worth while. According to a publication in October from the prestigious Institute of Economic Affairs entitled Better Off Out? we would be rather better off if we left the Treaty of Rome or the European Union as such and merely retained access to the single market. The authors have not been challenged on their analysis as to how we could easily arrange some amicable parting of the ways. Even if we left in bad odour, and the others did their worst against us, the authors show how the loss to our economy would be minimal. In case any noble Lord feels that I am straying from the Motion, I respectfully submit that he may be wrong. I am suggesting that the only way to escape from the damaging effect of these directives, as with so many other directives, may be to be prepared to leave the treaty.
The Government now justify all these iniquities by saying that 60 per cent. of our exports go to the European Communities, with the implication that we therefore cannot afford to upset them.
But we trade in deficit with Europe and in any case the figure of 60 per cent. is much exaggerated. May I ask my noble friend on the Front Bench to take note that the Central Statistical Office says that something more like 40 per cent. of our exports go to Europe? Of course, that is still an important figure but not one which should be allowed to subject us to the sort of problems that we have been debating tonight.
There are, of course, dozens of other industries which are similarly affected. To get our relationship with Europe into better perspective, 80 per cent. of our overseas investment is outside the EU and only 9 per cent. of our overall trade is with the European Community. Another 9 per cent. is with the rest of the world, which means that some 80 per cent. actually takes place within the UK.
So I fear the time has come to ask whether the Government accept the harmonisation inherent in the single market legislation too easily. What is the point, I must ask my noble friend, of being forced to play on the level playing field of Europe if its rules force us to lose out to our competitors in other far more vibrant economies? That seems to me to be the question now facing the United Kingdom art market. I shall he most relieved if my noble friend can give the House a satisfactory answer and show that my fears are groundless.
§ 9.1 p.m.
§ Lord Haskel
My Lords, I congratulate the noble Viscount on his Question. It is an important matter affecting not only our commercial life but also our cultural life.
As all noble Lords have said, the proposed European directive harmonising VAT and artists' resale rights is a threat to the art business—a business we must do what we can to retain.
It seems to me that noble Lords have raised two main issues: harmonisation, and the ability of Europe to compete in the world art market. As the noble Viscount, Lord Blakenham, pointed out, we are in a single market with the objective of a level playing field. As a result we shall see harmonisation of VAT on all products and services within the European Union unless we withdraw, as the noble Lord, Lord Pearson, suggested. This applies to all businesses, and many have prospered. The noble Lord, Lord Pearson, spoke of room to manoeuvre. I believe that this is a commercial matter and, under Clause 100(A), the directive will be settled by majority voting.
I find it difficult to understand why our partners in Europe should agree to our having a competitive advantage so far as concerns VAT. The noble Lord, Lord Gillmore, told us that we have these advantages, and a derogation for two more years. During that time we have benefited and we shall continue to benefit. But people in the art market must realise that this is an artificial situation which will be changed eventually. However, we have undoubtedly used this time to build up other competitive advantages. The noble Lord, Lord Hindlip, told us about the advantages of language, location and probity. We can build on other advantages: service, connections with artists and collectors, and new galleries. I am sure that we can benefit from all those in the future. In future dealers will also have to compete on the basis of their margins, as many other businesses have had to do when faced with more competition.
Of course there is a mixture of advantages and disadvantages. For instance, harmonisation has opened up the French market. I am sure that with open competition and full access, British artists will thrive and British art dealers will be able to compete in Europe.
I hope that the Minister will press for this harmonisation of VAT to lead to a simplification of VAT. We are told that there will be a review at the end of 1998, and I hope that by that time the cumbersome system of different rates for art of different ages and from different sources will be harmonised and simplified. A complicated VAT regime only encourages the VAT avoidance industry.
The noble Lord, Lord Gillmore, told us that artists' resale rights is an international not just a European matter. I agree with him. If we are to argue that on the international stage, it is probably best done at this time through the European Commission rather than by Britain on its own. I do not agree with the noble Lord, Lord Pearson. This could be a social rather than an economic matter. The Government might argue that the issue should be brought forward under the social 1174 chapter. It is certainly treated as a social measure in Germany, presumably because pictures and works of art are not always sold at a profit. However, as other noble Lords have said, the Minister may prefer harmonisation because it is a relatively minor matter and not worth getting into a fight over. Again, harmonisation will ensure that our artists and dealers have equal access to markets in other parts of the Union.
Harmonisation of artists' resale rights may well benefit established artists and not the younger emerging talent, as the noble Lords, Lord Freyberg, and Lord Strabolgi, pointed out. As they also pointed out, the cost of collecting and distributing this money is far too high. Somehow that needs to be altered. I wonder whether the Minister has given some thought to slotting it into the benefits system.
This is obviously an emotional matter of concern to artists, and the system of collecting and distributing the money for artists' resale rights is probably best left to local custom. It is perhaps a clear case for subsidiarity.
On competitiveness, the noble Viscount, Lord Blakenham, is right. When considering the level at which to harmonise VAT and artists' resale rights it is obviously important to consider the competitive position of Europe as against other centres such as New York or Zurich, as noble Lords have mentioned. It is no use levying a tax which destroys the business.
However, the proposed resale rights levy is on a sliding scale from 4 per cent. to 2 per cent., as other noble Lords have mentioned. This is to help deal with the more expensive works of art. In addition, the proposed VAT is at the lowest possible level, which is 5 per cent. Surely a lot of other factors will also apply, not least where the buyers are and where they would like to be. As the noble Viscount, Lord Blakenham, suggested, first consideration must be given to the buyers. There are many good social, commercial, political and other economic reasons why they would like to be in Britain and within the European Union.
The noble Lord, Lord Hindlip, and my noble friend Lord Strabolgi mentioned the United States. Of course, there are taxes in the United States, too. There is a state tax of between 6 and 8 per cent., which is tending to go up and not down. Comparisons are therefore difficult, and I agree with noble Lords that more investigation needs to be done. When discussing the level of VAT and artists' resale rights, the Government should point to the success of the British art market as proof that VAT should be nearer our levels than the higher levels which apply elsewhere.
I agree with other noble Lords that it is important to get this harmonisation right, but it is important for cultural reasons as well as for commercial reasons. Obviously, artists and dealers need each other. New artists are the seed-corn of the business and a successful art market can support new art and new artists. This will also attract buyers, and the galleries will follow the buyers. As other noble Lords have pointed out, this will lead to further economic activity.
In recognising that the new directive will have a major impact on the art world, perhaps one way of making sure that it has a lesser impact on the British art 1175 market is to play a much more positive role in shaping European cultural policy. For example, it is important to play a much more positive part in the monthly meetings of European culture ministers. I am told that the Government often do not even bother to attend. Labour shadow Ministers have raised this matter in another place and explained that we need to match the enthusiasm of our European partners for cultural policy in Europe. I am sure that that is an important way of reducing any damage which might be done to art in Britain by this directive.
I congratulate noble Lords on demonstrating that this is not a minor matter. It is important for cultural and commercial reasons.
I leave it to the Minister to respond to the point about withdrawing from the single market raised by the noble Lord, Lord Pearson.
§ Lord Pearson of Rannoch
My Lords, I did not suggest withdrawing from the single market; I assumed that we would retain access to the single market. I suggested that we should start thinking very strongly about withdrawing from the Treaty of Rome.
§ 9.11 p.m.
§ The Minister of State, Department of Trade and Industry (Lord Fraser of Carmyllie)
My Lords, I am grateful to all noble Lords, but particularly to my noble friend Viscount Blakenham, for giving this very important issue an airing. I am grateful to all noble Lords who have contributed for applying a most helpful expertise to the issue.
Of the many speeches that I have made at this Dispatch Box, in some respects I would regard this as the most redundant one that has been required of me. It has been perfectly obvious to me that every argument I would have sought to deploy has already been deployed. However, at the risk of being repetitive, let me set out the Government's position. I hope that, if nothing else, it will indicate to those noble Lords who have contributed the seriousness with which we take the issues that they have raised. They are all, without exception, absolutely right.
The United Kingdom art market is unique in Europe, not only because it is international but because of its size. Much of London's business is devoted to importing and selling works from third countries, particularly the United States of America and Switzerland, and re-exporting them.
The Government take very seriously concerns that value added tax and artists' resale right could damage that competitiveness. We recognise that introduction of artists' resale right into the United Kingdom could lead to sales of art subject to the right switching—this is the critical detail—not to other European capitals, but to third countries. The noble Lord, Lord Freyberg, and other noble Lords were absolutely right that the beneficiaries of this are likely to be New York, Switzerland and possibly the Far East.
1176 I would say to the noble Lord, Lord Haskel, that I thought that in some respects what he said was disappointing in failing to grasp that this is not an issue between member states of the European Union. The issue is what will happen vis-a-vis third countries.
Sellers look to markets offering the best deal. The United States Copyright Office has already considered and rejected the idea of introducing artists' resale right into the United States. They have done so because of experiences in Europe and in California—the only state in the United States to have such a right. Switzerland, too, has decided against the introduction of that right. Why? Specifically because it wishes to build up its international art market.
The Government are well aware that the British art trade believes there is growing evidence that the seventh VAT directive is already beginning to have an adverse effect on the balance of trade in works of art and that introduction of artists' resale right into the United Kingdom would make matters worse.
In the brief time available to me, let me seek to address those issues more specifically. In reaching agreement on the seventh Value Added Tax Directive, the United Kingdom was anxious to ensure that VAT on the importation of works of art from third countries did not jeopardise the competitive position of member states in the global fine art market. Resolution of these concerns was integral to the terms on which the UK agreed to the directive. In recognition of that and of the particular position of the London fine art market, the United Kingdom was allowed—as a number of noble Lords mentioned—to apply an effective VAT rate of 2.5 per cent. until the end of June 1999 on art imports which were formerly exempt instead of the minimum 5 per cent. otherwise provided for in the directive.
What is important to appreciate, even without the 2.5 per cent. imposition, is that the Commission is committed to providing the Council with a report before the end of 1998 on the impact of that seventh directive on the competitiveness of the Community art market compared with third countries' art markets. I can assure your Lordships that the United Kingdom will take part in that review. I say to my noble friend Lord Hindlip and the noble Lord, Lord Gillmore, that we shall ensure that the views of the British art market are properly represented and any detail that can be provided to the Government will be very helpful.
I turn to artists' resale right. Eleven member states have artists' resale rights in their legislation. The interesting thing is that in practice it is not applied by all of them. The right does not exist here nor does it exist in Ireland, the Netherlands or Austria. I say to the noble Lord, Lord Strabolgi, that he is right. There is provision for this under the Berne Convention but the critical detail is that under that convention it is an optional right rather than one that is mandatory.
It would appear that the majority of member states favour harmonisation. The noble Lord, Lord Strabolgi, will recall that in April, when I replied to a question on this right from my noble friend Lady Rawlings, I indicated that the Government were far from persuaded that there was a case for the introduction of 1177 artists' resale right into the United Kingdom. Not surprisingly, consultations since then have shown a sharp polarisation of views. The art trade wants the Government to oppose the proposal outright, whereas a significant number of artists are in favour. However, I understand that some well known artists believe that the proposal will lead to first sale prices falling, with no royalties materialising to compensate. I say to the noble Lord, Lord Gillmore, that I was grateful for his confirmation that that is a widely held view.
The independent Whitford Committee, in the run-up to the Copyright, Designs and Patents Act 1988, considered whether artists' resale right should be introduced into the United Kingdom. It concluded that the right was not necessarily fair or logical and that the lesson to be drawn from experience abroad was that the right was not practical either from the point of view of administration or as a source of income to individual artists and their heirs.
The truth of those words appears to have been borne out pre-eminently in France, a country where the right exists. As a number of noble Lords mentioned, one of the French societies responsible for collecting and distributing artists' resale royalties has got into such financial difficulties that it can no longer continue. A representative of the other society—again, a number of my noble friends mentioned this point—has admitted that most of the royalties collected by that society go to a small, wealthy elite—some six families. It is the heirs of Picasso who are successful, not the starving artists in Parisian garrets. I am grateful to noble Lords for dispelling with their arguments the romantic nonsense that such a measure would significantly assist young artists. The demolition job done on that particular argument was so well done that I can add nothing to it.
The experience bears out studies made earlier this year by two distinguished economists. The studies warn against the Commission's proposal, arguing that sales of works of art subject to that right will switch from the European Union to third countries, with the majority of artists ending up worse off.
My department has submitted to Parliament its own studies on the impact of the Commission's proposal on the United Kingdom art market. They reveal that introduction of the right could, as others have said, lead to the British art market losing earnings of up to £68 million with some 5,000 jobs going. That is, if all sales of works of art in London susceptible to the right migrated to third countries. Artists would receive nothing and everyone would lose.
Even on the benign assumption of no sales switching to third countries, application of the right would yield royalties of something like £9.8 million at the most. The significant part of that would be consumed by collection and distribution costs. What remained would have to be shared between British and other European artists. The majority of British artists would probably receive little if anything. In the Government's view, the risk of the 1178 introduction of the right into the British art market is disproportionate to and outweighs any conceivable benefit to artists.
We can only speculate at this stage on what the combined effect of VAT and the introduction of such a right would be on the United Kingdom art market. The impact of VAT will be clearer once the Commission produces its report. However, we are convinced that the introduction of the artists' resale right would do irreparable damage. There is no evidence whatever that British artists have to date been disadvantaged through the lack of that right.
We entered a general reservation on the Commission's proposal at its first reading in June. We pointed out that the art market is not internal to the Community but is world wide. We invited the Commission to provide a full cost-benefit analysis of its proposal and it has been informed of my department's studies, which I mentioned. We see no reason why member states who have chosen not to have the right should be obliged to introduce it merely because others have done so. Different countries have different needs. A better way of harmonising, in our view, would be to abolish the right altogether.
I was asked a number of detailed questions about how we might approach negotiations on the matter. Our position at the present time is this. We take a robust stance. We are not interested in discussing detail to achieve a compromise; what we are in the business of doing is persuading and explaining to our European partners that it is an ill-directed exercise that will not benefit those whom they seek to benefit.
I am conscious that I have had to rattle through my closing speech in some measure and I hope that I answered most of the questions put to me. What I am at pains to stress is that we are in a stage of argument at the present time. We do not accept the directive and we believe that the force of the arguments advanced this evening are of such a character that it would surprise me if anyone were not persuaded by the importance of maintaining the present position.
I know that on some occasions in debates such as this those who have interests to declare may do so a little reluctantly in making their contribution. This is a specific occasion where that expertise has been extremely helpful and I trust, as we go forward in advancing our arguments, that the force of the arguments addressed to your Lordships' House this evening will persuade those elsewhere in the European Union that this measure is ill-directed and the sooner it is confined to some dusty shelf for eternity the better.