Imported Works of Art: VAT Increase (Hansard, 10 March 1999)

§ Lord McIntosh of Haringey
My Lords, under EC law governing VAT on the importation of certain 219 works of art, agreed in 1994 by the previous government, the United Kingdom should raise its VAT rate from 2.5 per cent. to at least 5 per cent. The Government are keen to change that, but the legal position can be altered only with the agreement of the European Commission and all other member states. It would be very difficult to estimate the combined effects of import VAT and droit de suite on the British art market.

§ Lord Pearson of Rannoch
My Lords, I am grateful to the Minister for that reply. However, I fear it means that he misled the House on 28th January when he said: "What we shall not do is level up to 5 per cent. ". —[Official Report, 28/1/99; col. 1209.] Since the Minister's Answer also proves that the Government's much-vaunted charm offensive in Brussels has failed, will they now invoke the Luxembourg compromise and use the veto to save this highly important national interest? It is worth double our pop industry to the United Kingdom economy.
Secondly, as our Eurobond market, our mergers and acquisitions industry and many other British interests are now on death row in Brussels, do the Government at last agree that the time has come for an objective cost-benefit analysis of our adherence to the Treaty of Rome?

§ Lord McIntosh of Haringey
My Lords, the noble Lord quotes me correctly on 28th January. Unfortunately, that part of my speech got completely garbled. Immediately before that I said that we would be seeking to level down to other countries, which is clearly nonsense. I apologise for saying that what we shall not do is level up when I meant that we shall do our very best not to level up, as the noble Lord knows.
The noble Lord then asks whether we have abandoned our attempts. On the contrary; at the Internal Market Council on 25th February my noble friend Lord Simon of Highbury managed to achieve further consideration of the draft directive by the Committee of Permanent Representatives. That means that we are talking again. Under those circumstances it would be premature to talk about using the Luxembourg compromise which—I remind the noble Lord—can be used only in conditions of vital national interest. Meanwhile, we are carrying out an independent UK study of the directive. I will not go so far as to agree to the wider inquiry which the noble Lord wishes the Government to undertake.

§ Lord Shore of Stepney
My Lords, we all accept that it was very unfortunate that on 28th January a categorical assurance was given to the House that there was no question of tax changes being imposed upon us against our will. The Minister said, and I accept, that that was said in good faith. But it illustrates the lack of seriousness in the Government in assessing the pressures, dangers and risks of the drive for tax harmonisation which exists in the European Community today. Does he not agree that the increase in VAT of 220 2.5 per cent. on imported art works to 5 per cent. —we cannot resist it; we have no veto—will do great damage to the London art market?
Further, does my noble friend agree that the additional droit de suite 2.5 per cent. levy will only add to the difficulties? Again, we have no veto on it; we can only stop it by establishing a minority in a qualified majority vote.
Finally, I want to put this to my noble friend.

Noble Lords
Order, order!

§ Lord Shore of Stepney
My Lords, it is terribly important to get this right. I raised the matter specifically at the time and was given an absolute assurance. Can we not now begin to understand that so much depends on obtaining agreement with our colleagues that the unanimity rule is not enough?—otherwise we would never have agreed to impose the VAT, as the previous government did in 1994 without any opposition—indeed total acceptance—by the official Labour Opposition at the time. I hope my noble friend will give some assurances that he will treat further threats of the withholding tax and other matters with greater seriousness than has been shown so far.

§ Lord McIntosh of Haringey
My Lords, I understand and sympathise with the passion which my noble friend shows for these issues. However, he must not infer from that that anybody else is treating it with anything less than the serious attention it deserves. He is right in saying that the 7th VAT directive, under which these changes come, was agreed by the previous government without objection from the Labour Opposition. But that is the end of any party political point that can be made of it. These changes are not in themselves evidence of any fresh moves towards tax harmonisation in the general terms expressed by my noble friend. We will continue to encourage the development of measures against harmful tax competition while continuing our objection, which we can sustain, against tax harmonisation.

§ Lord Inglewood
My Lords, is this not an instance of the Community shooting itself collectively in the foot? While London for the time being is the principal art market centre within the Community, there is no reason why that should continue. These levels of VAT will condemn the Community as a whole to ring-fencing itself from being in a position to sell works of art from outside the Community.
Secondly, is it not the case that the principal beneficiaries of droit de suite are in fact the heirs of a number of extremely well-known painters and not struggling artists? Is it not also the case that it applies only to works of art sold at auction rather than by private treaty, which by any standards seems to be illogical?

§ Lord McIntosh of Haringey
My Lords, the noble Lord asks questions about both VAT and droit de suite. Some countries in the European Community at present have VAT rates of 5 per cent. or even more and therefore, presumably, would not suffer if there were a 221 levelling up, though as I said before, we shall continue to resist that. In relation to droit de suite, the evidence is rather confusing. It appears that in France, where droit de suite has been going since 1920, around 80 per cent. of the receipts go to 20 per cent. of artists or their families. I have been unable to find out what proportion goes to living artists. However, as far as we are concerned, the amount of money which might go to artists is very small; indeed, it could hardly be more than £10 million, of which £2 million might go to British artists. It could also have the effect of depressing prices even for first sales.

§ Lord Jenkins of Putney
My Lords, is my noble friend the Minister aware that a distinction must be drawn between tax harmonisation and droit de suite? Is it not the case that tax harmonisation is for the benefit, or otherwise, of governments, whereas droit de suite is for the benefit of the artists? Therefore, to draw the two together and put them into a single sack is quite wrong.

§ Lord McIntosh of Haringey
My Lords, my noble friend is quite right. That is why I resisted the extension of the Question to include tax harmonisation in general. Of course, there are arguments on both sides. The best regulatory assessment that we have on droit de suite is that £360 million of sales would be affected, with a maximum earnings loss to the British art market of £68 million. Against that we have to balance £10 million which might go to artists. It is on the basis of that balance that Her Majesty's Government have opposed the extension of droit de suite.

§ Lord Skidelsky
My Lords, I should like to be clear about the exact position in the art market. If the Government's efforts in Brussels fail, is it the case that we will have no alternative but to accept the 5 per cent. VAT on the sale of imported works of art and, indeed, that we will have no alternative but to accept a harmonised rate of royalty to be paid to artists and their successors for 70 years, whenever one of their works of art is sold in this country? Can the Minister say whether that is an accurate statement of the present position?

§ Lord McIntosh of Haringey
My Lords, the noble Lord has actually asked two questions. The answer to the first one is, yes. If the present reconsideration of the draft directive which has been achieved goes ahead, it is likely that we would have to raise our VAT rate from 2.5 per cent. to 5 per cent. As far as concerns droit de suite, I can tell the House that there is a proposal on the table as regards the draft directive of 2 per cent. on the most expensive works of art; 3 per cent. to 4 per cent. on less expensive ones; and no droit de suite on even less expensive works of art. Indeed, there is a whole variety of options of droit de suite which might be adopted. It is far too early to say what could be achieved. However, the fundamental point behind what the noble Lord has said is that the legal position can be altered only with the agreement of the European Commission and all other member states.

§ Lord Haskel
My Lords, does my noble friend the Minister agree that the suggestion that an increase in 222 costs of 2.5 per cent. would cause financial ruin to companies is something of an exaggeration? We should bear in mind the fact that, over the past few years while this matter has been discussed, most companies have increased their competitiveness and productivity by 10, 15, 20 or even 30 per cent.

§ Lord McIntosh of Haringey
My Lords, that is exactly why I said in response to an earlier question that the maximum loss to the British art market in earnings would be £68 million. That is based on the assumption that all of our relevant sales went across to New York. But that is highly unlikely; in other words, my noble friend is right.

§ The Earl of Lytton
My Lords—

Noble Lords
Cross Benches!

§ The Earl of Radnor
My Lords, if the art market went to New York and the auction houses took their business there and operated in that city and all this droit de suite and the extra VAT came in, can the Minister tell us what kind of effect that would have on the export licensing of any remarkable pieces of art? For example, would people be able to take them to New York and receive an export licence in order to do so? It seems to me that it might cause considerable disruption if such a thing should happen; and it might.

§ Lord McIntosh of Haringey
My Lords, questions regarding export licences are entirely different from droit de suite. Indeed, there is no necessary connection between the two. It is not necessarily the case that we would need, or wish, to reconsider the issue of export licences.