Museums and Galleries: VAT

HL Deb 29 March 2000 vol 611 cc846-79

5.27 p.m.

Lord Freybergrose to call attention to the case for extending Section 33 of the Value Added Tax Act 1994 to include national museums and galleries which are the responsibility of central Government; and to move for Papers.

The noble Lord said: My Lords, it gives me great pleasure to introduce this afternoon's debate on the case for extending Section 33 of the VAT Act 1994 to include national museums and galleries. This is an exciting and hugely helpful proposal for simplifying a long-standing museum predicament. It is also of vital importance if we are to stop the financially damaging division between national museums that charge admission, and those that do not.

In the arts debate a fortnight ago, initiated by the noble Baroness, Lady McIntosh, I drew attention to the National Art Collections Fund's ingenious and imaginative proposal to permit the national museums to reclaim VAT on non-business activities without having to charge for entry, thereby putting non-charging museums on the same footing as charging museums and most local authority museums.

A number of speakers drew attention to the Government's pledge of free admission to national museums. The noble Lord, Lord McIntosh, referred to the subject as "well-worn". I should like to assure him that free admission, important though it is, is not the focus of this debate. Instead I shall concentrate on the damage caused by the present VAT system to all our national museums and their ability to deliver their core objectives. It is essential that the VAT anomaly is sorted out. I urge the Minister to do everything he can to resolve it. It will not go away and, until it is properly addressed, schemes for increased access to museums, however, imaginative, will always be limited.

Put at its simplest, charging museums can recover VAT, free museums cannot. By allowing the two systems to co-exist, the Government are favouring charging museums and penalising non-charging ones. That not only goes against their avowed desire to achieve universal free admission; it actually offers financial inducements for museums to introduce entry charges. I hope that that is not the Government's intention, and, if it is not, can they please get to grips with the current anomaly?

The VAT nightmare unites charging and non-charging museums alike. What possible advantage is there in forcing museums to commit enormous amounts of time and energy devising methods of VAT recovery rather than focusing on their core activities? National museums have to devote considerable resources to consultancy fees, employing experts to devise schemes specifically to recover VAT because the sums involved make such a difference to them. Sound financial management, yes, but expensive tax consultants? Surely we would much rather they concentrated on their public service priorities such as access, education and outreach.

There is, however, one potential solution to which the Government should give serious consideration. Last summer, at the suggestion of the DCMS, the National Art Collections Fund teamed up the Charity Tax Reform Group to look at possible answers to the VAT problem. They came up with a satisfyingly simple scheme which in its final form, and after proper consultation with the national museums, tax specialists and the European Commission was submitted to the DCMS in January this year. What it proposed was a at, by adding them to Section 33 of the VAT Act 1994, all the national museums could recover the VAT they incurred, regardless of whether or not they charge admission.

The concession already applies to a number of government-funded bodies such as the BBC and local authorities—and thus to some museums funded by local authorities. At a stroke, this proposal would remove the anomaly between charging and non-charging museums and it would also end the circular process whereby government grants are used to pay VAT back to that same government, but with considerable additional administrative costs.

There are several reasons why the national museums and galleries should be added to Section 33. For one thing, they are funded by central government—in other words, out of taxpayers' money—and all hold and maintain national assets on our behalf. For another, their funding is closely tied to the delivery of public service objectives, including significant public access to their collections. The national museums are exactly what their name suggests: a huge resource for the entire nation. The majority may be located in the South East, for which there are historical reasons—and here they are visited by and accessible to millions of Britons from around the country. In addition, they are repositories for world-class scholarship, education, inspiration and excellence of all kinds. It is crucial for all of us that this excellence is maintained, along with the buildings that house them.

Why are we penalising our national institutions when many of our local museums are covered by Section 33? Should not the nationals be able to serve the public unhampered by VAT considerations? Customs are now apparently arguing that it is the policy that Section 33 status can be conferred only on bodies that have the right to precept on local taxation. This may be a policy developed by Customs, but -it is not the one based on the law. There are already a number of bodies within Section 33 that do not have the right to precept on local taxation. Is Customs saying that these bodies should not be included in Section 33? If not, the policy is clearly inconsistent and discriminatory. It seems ridiculous that a policy that has been developed by Customs has the effect of preventing the Government from fulfilling one of their key policy aims. It is clearly within the Government's power to re-examine the logic of their own guidelines. That this is within their rights so far as the European Commission is concerned has been confirmed at the highest level by Pierre Guieu, who was a senior official and drafted the Sixth VAT Directive. He states that, it is entirely a matter for the UK Government to develop a mechanism to prevent these organisations from having to pay VAT's. That leads me to my next point. If we do not adopt a solution such as this, there is a real danger that the Government's policy of free entry for children and pensioners will unravel. While welcoming today's statement on free admission for pensioners. I understand that Customs and Excise will review whether museums can be regarded as "businesses" if more than half of their visitors get in free. That may well happen—visitor numbers have increased by an average of 18 per cent in the last year, since children have been allowed in free. I share the Government's desire to see increased visitor numbers at national museums. But what a nonsense it would be if we have a situation whereby "too many" free visitors results in museums having, as it were, to "compensate" Customs and Excise.

I should be grateful if the Minister could assure us that that is not going to happen—although, even if he can, sadly, that will offer reassurance only in the short-term. As we all know, it is well within the remit of Customs and Excise to review this, and any such informal arrangement, as and when it chooses in the future.

Previous attempts to address the VAT problem have been thwarted by claims that the Government are powerless to act because of contrary European legislation. The Government will be cheered to learn that that is not so. Indeed, no less a person than the head of the European Commission's taxation unit has stated that Section 33 of UK VAT law does not conflict with the European common VAT system.

A comparison with other EU countries reveals that the Commission tolerates a variety of regimes. There is not a universal application of VAT, in so far as public sector bodies including museums and galleries are concerned, but an ad hoc situation where different member states apply their own systems while conforming to the provisions of the Sixth VAT Directive.

By restricting the amendment to national museums and galleries only, the cost (in terms of lost revenue to the Treasury) can be identified and contained. Such a scheme would be simple to achieve, as the Treasury has the power to add to the list of bodies in Section 33 by means of an Order in Council and primary legislation would therefore not be required. The exact cost of amending Section 33 is difficult to estimate, given that a museum's capital works vary from year to year. However, to give noble Lords some idea, if we take the British Museum, the National Gallery, the Tate and the National Portrait Gallery, they estimate that the total annual amount of VAT they would be able to reclaim would average £3.1 million. That is money that could go to enhance their public services, rather than to Customs and Excise.

It would, of course, be necessary to ring-fence entry to Section 33 with robust qualifying criteria. The NACF, in consultation with the DCMS, has suggested 10 conditions that would have to be met, including: that the institution should be a national museum or gallery; should be subject to central government financial memoranda; that the majority of its trustees should be appointed by central government; and that there should be significant public access. In such a way, repercussive claims could be countered.

The Government set aside £30 million to help museums and galleries achieve free access for all to the collections by April 2001. How much of that is left? Will the Minister tell the House whether enough remains to meet the relatively small cost of this proposal?

What is becoming increasingly clear is that solving the VAT problem is not a matter for the DCMS alone. It can be resolved only if Customs and Excise and the Treasury are prepared to get together, examine the fine detail and come up with a logical, fair and joined-up approach. Different arms of government are failing to work together, to the detriment of museums and their public. I beg the Minister to use his considerable powers of persuasion and good sense to get his two departments together and devise a satisfactory solution. My Lords, I beg to move for Papers.

5.39 p.m.

Lord Strabolgi

My Lords, we are grateful to the noble Lord, Lord Freyberg, for initiating this debate. I congratulate him on his very thorough speech and the strong case that he makes for helping the free museums in this way. After all, these are some of the greatest museums in the country. Free museums must pay non-recoverable VAT on their associated expenditure and running costs, and that taxation can be quite substantial. This is an anomalous position vis-à-vis the so-called business category museums which make entry charges. There is also a grey area relating to those museums and galleries which offer free entry to children, students and pensioners but charge other visitors.

HM Customs and Excise has accepted that the admission of some visitors free of charge does not constitute a separate non-business activity to make those museums liable for VAT. However, the position is uncertain. I understand that Customs has indicated that it may challenge the tribunal's ruling in the case of the Imperial War Museum if some visitors, such as children and old age pensioners, are allowed in free. It seems that any compromise solution, such as the introduction of certain free periods for everyone, may also be challenged.

This Gilbertian situation goes right across the Government's policy of free admission for all to our artistic heritage by April 2001, for the reason that the more museums move towards free admission the more likely it is that they will be challenged by Customs. The result of this ridiculous state of affairs is that many museums are discouraged from dropping admission charges altogether. I hope that the Government recall that it was our noble friend Lord Jenkins of Putney who, when Labour Minister for the Arts, abolished admission charges; indeed, it was almost the first act of the new Labour government in 1974. That has been modified since by the Conservatives to allow the trustees of each museum to decide whether or not to charge. But our two greatest institutions, the British Museum and the National Gallery, do not charge; and the former has never charged, except for special exhibitions, since its foundation. I wonder how much longer these two great institutions will be able to hold out. The same goes for many other important museums and galleries, such as the National Portrait Gallery, the Wallace, the Tate and the National Galleries of Scotland.

The noble Lord, Lord Freyberg, proposes a solution which I support, and I hope that it will receive serious consideration by the Government. I looked at the 1994 VAT Act and noted that the Long Title was not restrictive. Section 33(3)(k), to which the noble Lord referred, allows other bodies to be added by order made by the Treasury. The revenue lost to Customs would not be great: I understand that it would amount to only about £3 million. That figure represents the VAT which the free museums and galleries would be able to recover if Section 33 were extended. This is not a large sum, but it is very important in terms of the institutions' own budgets.

Problems over VAT are beginning to affect decisions to the detriment of our cultural life. I hope that the Government will take action to remove these anomalies. For example, paintings created since 1973 are liable to VAT. That bears very heavily on museums such as the Tate and the Scottish modern art galleries which have large collections of contemporary art. A contemporary painting costing, say, £200,000 would be liable to VAT of £35,000. That is most onerous in relation to any gallery's purchasing power. I hope that my noble friend will do something about it.

As the noble Lord, Lord Freyberg, said, the European Commission has said that this refund scheme does not conflict with the EU's common VAT system. The noble Lord gave credence to that by quoting the responsible Head of Unit in the directorate-general of the European Commission concerned with taxation. If there are problems with Brussels I hope that the Government will seek to remove the anomalies and show the same resolution as they showed in their negotiations with Brussels over the ill-judged proposals relating to droit de suite, as a result of which they gained some important concessions and had the backing of all parties in your Lordships' House. If it is just a national problem based on fears of a precedent, which is the usual basis for so much resistance to change, I hope that the Government will take steps to put it right by legislation.

5.45 p.m.

Lord Criekhowell

My Lords, not for the first time the noble Lord. Lord Freyberg, has rendered a service by raising an important issue in this House. But I have learnt the hard way that there is one unalterable rule of politics: when government policy is most illogical Ministers will defend it with particular stubbornness. I fear that the Minister will declare that the present rules are holy writ and cannot be altered. I hope that I am wrong.

The first illogicality with which we are confronted is that, although t is government policy that museum access should be free, the rules which prevent the reclaiming of VAT provide a compelling incentive for national museums to charge. The second illogicality is that local authority museums and galleries can reclaim VAT but national museums and galleries cannot. I illustrate the effect of the incentive with an example. In the case of the National Museums and Galleries of Wales, half the gross income from admissions of about £1 million a year goes in the cost of collection; but recovery of that is worth about double the gross income from admissions.

When recently I asked the noble Lord what his response was likely to be to the case that we intended to present, he told me—I believe with regret—that the advice he had received was absolutely firm: Section 33 of the 1994 Act could not be extended by order to include the national museums and galleries, apparently on the grounds that all those bodies covered by the present exemption levied charges and not taxes. That is a rather different point from the one made by the noble Lord, Lord Freyberg, who said that the issue was whether it was a precept by a local authority.

I understand that the argument within departmental circles is that an exemption that is designed for local authorities which levy rates cannot be extended to bodies which are funded primarily by means of government taxation. I suspect that the Minister will produce other arguments as well, some of which we know by heart. Those arguments are always wheeled out on these occasions and include our old friends "the awkward precedent", "the floodgates once opened cannot be closed" and "the excessive and unbearable cost". All of those arguments can be answered.

I dwell on the first argument: the distinction that is said to exist between a levy and a tax. Can it be seriously argued that a local authority rate paid by me to help provide public services is fundamentally different from a tax paid by me to the Inland Revenue to provide public services? Why should such a narrow difference of nomenclature and technique in raising public funds produce absurd differences of treatment between organisations which provide the same service?

Let us look a little further at local authority funding. A very high proportion of it comes from the rate support grant, not the rates; in other words, taxes. If the original object of the exemption was to prevent a circular transfer of funds in which grants arising from taxation repaid VAT lost by local authorities, surely it is just as desirable to avoid a similar circulation of funds in relation to national museums.

As for the "precedent" and "floodgates" arguments, let us consider what has been done already. The exemption business began with local authority museums and the BBC. It was extended to include ITN so that it could compete with the BBC; and it has been further extended to an extraordinary range of other organisations. Limited steps have been taken, each for a good reason, and limited steps can be taken again.

If the Minister tells us that the distinction between a levy and a tax is important because of the rules of the European common VAT system, then I draw his attention to the response made by Stephen Bill, Head of Unit, Directorate-General Taxation, European Commission, to the Charities Tax Reform Group about the present Section 33 arrangements. He said: This refund scheme does not conflict with the European Common VAT system and could be considered as a sort of subsidy granted to the bodies mentioned". I return to Wales and the example represented by NMGW. There can be no doubt that the introduction of charges has significantly reduced visitor numbers to the National Museum and Gallery in Cathays Park, Cardiff, which has recently been described in the Which? guide to tourist attractions as "an outstanding flagship museum", as well as to the other museums and galleries elsewhere in Wales.

The director tells me that there is no question that free admission for all is what will make NMGW truly accessible. We anticipate that visitor numbers will increase by at least 50 per cent with full free access in the short term and by over 100 per cent in the long term. However, the present substantial income from VAT recovery cannot be put aside by the museum authorities. Budgets are much too tight already, and the museum's plans for the future are dependent on adequate revenue funding. Its capital programme for developments is where the big "gain" from VAT recovery lies. Even if we ignore the £25 million art and £2.2 million Welsh Slate Museum projects already finished, the museum is planning to spend £6.6 million on the Big Pit Museum, £1.3 million on the Museum of the Welsh Woollen Industry and perhaps £20 million on the Industrial and Maritime Museum in Swansea. The ability to claim back VAT represents an essential feature of the funding programme for these projects.

The Big Pit Museum has also been praised by Which? as, a vivid record of authentic industrial heritage". The future of this marvellous museum is now in the balance. The Heritage Lottery Fund has offered a grant of over £5 million to secure its future, but that is dependent on revenue funding of £400,000 a year being forthcoming from the Welsh Assembly and the maintenance of other income. The heritage lottery grant can be used to lever a matching sum from Europe under the Objective 1 programme. The same is true of the much larger Swansea project.

Therefore, what we are talking about this evening in this House is not just something that is important for those of us who believe that our museums and galleries throughout the United Kingdom make a contribution of immense significance to the cultural and social life of the nation, but in Wales they are important too because there current projects form an important part of the programme of economic and social regeneration that the Welsh Assembly has inherited from its predecessors in the Welsh Office. Those pressing for reform have a powerful case. The Government really must respond positively.

5.53 p.m.

Lord Gibson

My Lords, if this debate necessarily has a rather narrow focus, it is none the worse for that. The proposal of my noble friend Lord Freyberg for a small and simple amendment to a tax regulation would have a major effect on progression to what we all believe is the Government's declared aim; namely, universal free access to our national museums and galleries.

The value of VAT recovery, if museums charge for admission, is a very important factor when museums have to decide whether to charge. As the noble Lord, Lord Crickhowell, has pointed out, that is particularly true if they are embarking on a big building project. There is a great deal involved. My noble friend has explained the matter clearly and succinctly at least twice in your Lordships' House, once today and once in the Arts debate a few weeks ago. There is no need to repeat his explanations, which are admirable. We are grateful to him. I want to support him as emphatically as I can.

There could only ever have been two objections standing in the way. First, it might have been supposed to be inconsistent with EU directives. But as he and the noble Lord, Lord Crickhowell, pointed out, this limited amendment is unlikely to run any such risk. The EU is sympathetic, in principle, to low taxation on cultural expenditure.

A second and perhaps more powerful objection might have been the possibility of repercussions; that is to say, that if museums and galleries were brought within the scope of Section 33 a good many other public institutions might clamour for admission through the same door. If that is the case, can we be told who and what they are? Is it genuinely the case that it cannot be done for museums because others would expect the same treatment? If the "floodgate" argument is used, we must be told who will be able to come in on the flood. What other public bodies are there not now qualifying as businesses for VAT that would have to be allowed to do so if non-charging museums were allowed to charge?

The fact is that in allowing local authorities and certain other public institutions, such as the BBC and ITN, to qualify, the 1994 Act did in all logic open the door to museums and galleries. But it is hard to see what other public funded bodies remain to queue for admission on similar grounds. Surely, it is quite absurd if for want of a small, simple and easily introduced amendment to tax regulation, which need have no repercussive effect, present arrangements are allowed to go on undermining the Government's own declared ambition to achieve universal free access to our national museums and galleries.

My noble friend Lord Freyberg asked an interesting question arising out of the free admission of pensioners and children by those museums which otherwise make charges. If the proportion of pensioners and/or children visiting a particular gallery goes up to half the total, Customs and Excise may take the view that the business status of that museum is no longer valid and VAT no longer recoverable. Might the board of such a gallery have to limit the number of pensioners and children it admits because they could not afford to lose the museum's VAT business status? One only has to ask that question to realise what a crazy situation we are discussing. For generations the administration of our country has been generally admired throughout the world. But it is very hard to admire an administration that tolerates an anomaly of this kind without putting it right.

Finally, we need a positive response in this matter sooner rather than later. Museums, like other institutions, have to make plans. They cannot run efficiently without knowing where they are going to stand. A major element of their revenue is at stake. I hope that we shall be encouraged by the Minister's reply. I believe he and his department are in sympathy with my noble friend's proposal.

Three years ago in this House the noble Lord, Lord McIntosh, was unable to go beyond encouraging museums to see whether a higher proportion of their turnover might be able to qualify as business turnover. The fact is that what matters is whether VAT is recoverable on a museum's main expenditure. Without that recognition we cannot make measurable progress towards what I take to be the Government's aim—that of universal free access.

Surely there can be no simpler way of moving in that direction than my noble friend's proposal. My noble friend Lord Freyberg has won the argument, but I beg the Minister, approaching the Treasury, to try to win the day.

5.58 p.m.

Lord Faulkner of Worcester

My Lords, I congratulate the noble Lord, Lord Freyberg, on initiating this debate. Universal free admission to national galleries and museums is a cause that I have always supported. My childhood was enriched by family outings to the South Kensington museums. I know that countless children of my generation, many of whose parents were far less able to pay admission charges than my own, benefited greatly from that experience as well.

I see that my noble friend Lord McIntosh of Haringey will reply to the debate for the Government. It would perhaps have been appropriate had your Lordships allowed him to speak twice: once as the Minister from the Department for Culture, Media and Sport, which wholeheartedly supports the principle of free admission, and once as the spokesman for the Treasury, which appears to be encouraging Customs and Excise to frustrate it. The noble Lord, Lord Freyberg, referred to "joined up government"—we hear a lot of that these days—but on this issue it appears that Customs and Excise seems determined to unpick the stitches so laboriously sewn into the tapestry by the DCMS.

I am not a tax lawyer and I do not claim to be an expert on the intricacies of VAT procedures. But I can recognise a good policy when I see one. The aspiration to achieve free admission at the 10 national museums which currently charge and to maintain free admission at those which do not is a policy like that. Chris Smith, the Secretary a' State, deserves a good deal of credit for improving the admission charging regime as much as he has. I strongly support the DCMS's decision taken in December 1998 to set aside £30 million so that in theory free admission for all could have been achieved by April 2001. That was to have been the last step in a three-stage approach which began a year ago with the arrangements to admit children and is being followed next week by the second step of allowing pensioners in for free.

However, to get full value from free admission for children, one has to allow accompanying adults in as well, because so many parents feel that their children need an adult escort when coming up to town to visit a museum or gallery. This is a policy which passes with flying colours new Labour's "For the many, not the few" test. A number of speeches made by members of the Government set out the arguments very clearly. In a press release dated 8th December 1997, Chris Smith said: Access is a cornerstone of all this Government's cultural policies, including those to museums and galleries. We want to see access to our cultural treasures made available to the many, not just the few". Earlier that year, in March 1997, when Labour was still in opposition, Dr Jack Cunningham and Mark Fisher, the shadow Ministers, published a document entitled Create the Future: a strategy for cultural policy and the creative economy. In a section headed "Making our national institutions more accessible", they said: We are concerned about the introduction of admission charges in national museums. These great collections have been paid for, and maintained by the British people. We will review the evidence on charging. Some evidence suggests that high charges can lead to a big decline in attendance". That is certainly true.

If one looks at the visitor statistics for the museums which have introduced charges, the picture is very clear. In 1986–87, the last year before charges were introduced, the Natural History Museum had 2.5 million visitors. In the first full year after charges, the number had fallen to 1.6 million. By 1996–97, the figure was still only 1.8 million. The fall at the Science Museum was even worse: from 3.16 million in 1986–87 to 1.12 million in 1989–90 and back up to only 1.5 million in 1996–97. Those figures have kindly been provided to me by the National Art Collections Fund and they differ slightly, but not in a material respect, from those which appear in the article in the Guardian today.

I have no doubt that if the National Gallery and the British Museum were forced to drop their present free admission policy and start charging, they would lose a huge number of their existing 5 million or so visitors. They would also be breaking faith with their benefactors who donated their treasures on the understanding that the people would be free to see them without charge. They might not lose too many of the devoted all-day visitors, but there would certainly be an end to what one might call the "lunchtime drop-ins", the office workers with an hour to spare who like to immerse themselves briefly in our art and antiquity treasures. They certainly would not spend £10, or even a fiver, for a short visit to the National Gallery or the British Museum. I should hate to see them deprived of that opportunity.

I occasionally hear the argument that while it may be okay to let British people in for free, the absence of charges means that we are subsidising foreign tourists. That is a pathetic argument. None of us expects to pay more than the locals for services in cities abroad when we travel as tourists, and in any case we should remember how much foreign tourists contribute to the economic welfare of London and other cities as tourist attractions. If more come here because our finest museums and art galleries are free, we should welcome that and say "thank you" to them.

Other speakers are better qualified than I to advise on whether Section 33 of the VAT Act 1994 can be amended in the way that the National Art Collections Fund and the noble Lord, Lord Freyberg, have proposed. I look forward to hearing what my noble friend Lord McIntosh has to say about that. If it is indeed the case that national museums can be brought within the scope of Section 33 and join local authorities and public institutions like the BBC in being able to recover VAT, that would seem to be a sensible and obvious route to adopt. But if it cannot be done in that way, I do hope that the DCMS and the Treasury can get together to find a solution.

For if it is right that £30 million should be set aside to help the museums achieve free admission by 2001, as the DCMS already has done, how can it be wrong to find just a little more to solve the problem completely?

6.5 p.m.

Lord Renfrew of Kaimsthorn

My Lords, like other noble Lords who have spoken, I should like to thank the noble Lord, Lord Freyberg, not only for introducing this theme but for his very clear exposition of the position and for introducing the admirable solution which has been put forward by the National Art Collections Fund. We are very much in the noble Lord's debt for doing so.

As a trustee of the British Museum, I am proud that the British Museum does not charge admission and that it has never done so. I believe that all trustees of the British Museum are proud of that circumstance. Long before I became a trustee of the British Museum, I found it a pleasure and a privilege, as a British citizen, to be able to enter that museum, the National Gallery, the National Portrait Gallery or the Tate Gallery without charge to see the great national treasures which generations of citizens have given to this country and others which have been purchased with taxpayers' money. It would be a sorry day if charges had to be levied in this area, which is of course a possibility.

We applauded the Labour manifesto which made clear that it was Labour policy to introduce free admission to national museums. We applaud—I am sure that I do not speak only for the British Museum—the strenuous efforts which the Secretary of State for Culture, Media and Sport has made in this direction. I very much look forward to the endorsement of the noble Lord, Lord McIntosh of Haringey, as the representative in this House of the Secretary of State for Culture, Media and Sport, of that admirable position.

The noble Lord, Lord Strabolgi, has correctly referred to the Gilbertian position in which the noble Lord who is to reply for the Government finds himself. The noble Lord, Lord Faulkner of Worcester, has correctly referred to that ambiguous position. For in this House he is not only the Minister for Culture, Media and Sport in the land of Titipu; he is also the Minister for Treasury affairs in the land of Titipu. So he stands Janus-like, looking in both directions. I very much fear that he may also have the role of Lord High Executioner in this matter.

Does the noble Lord not appreciate—it is a rhetorical question: he is very well informed; of course he appreciates—that if the Victoria and Albert Museum, the Science Museum or the Imperial War Museum were to abolish admission charges, they would at once, through this Gilbertian catch-22 situation, be obliged to pay VAT on their expenses? They would not only forgo the income from admission charges, which they might be willing or able to do, but they would also be subjected to that additional burden.

I should like to illustrate the difficulty by referring to the British Museum. It finds itself in considerable financial difficulties, although it is very grateful for the help it has received from the Government on a one-off basis for this year in this matter. In a normal year the British Museum suffers recoverable VAT of around £750,000 on running expenses and up to £1 million on capital expenditure. That expenditure is difficult to maintain and would be alleviated by the proposals made by the noble Lord, Lord Freyberg.

Moreover, the situation has been exacerbated by the Great Court project where total VAT costs of about £15 million are at risk. I was much enlightened by the Answer given yesterday by the noble Lord, Lord McIntosh, to the Question tabled by the noble Lord, Lord Freyberg. We read that, in terms of the National Lottery element of the British Museum's Great Court project, the estimate of future VAT recovery from project costs is £8.7 million.

I am happy to hear that and I have a two-part question to put to the noble Lord. First, can he confirm that if the lottery grant of £45.7 million is appropriately expended the British Museum will be able to recover the £8.7 million? Secondly, as the lottery grant was approximately 50 per cent of the total cost of the Great Court project, can he give an explicit assurance that the British Museum will be able to recover the other half, thereby giving a total recovery of £17 million? I can assure the noble Lord that that would be most welcome.

Perhaps I may also point out to the noble Lord that the British Museum has another important and inspiring project; the study centre project. It was to be financed by a PFI arrangement of some complexity. I have to tell the House—I would tell the noble Lord, but I believe that he knows it already—that that project is currently stalled, partly due to the VAT component which pushes it beyond the limits of viability. I should be delighted if he could assure the House and the British Museum that it need not pay VAT on that project either.

Finally, the amount of time and effort which the British Museum, like other museums, must spend on hiring consultants and all manner of specialists to analyse how best we may arrange our affairs is absurd. On that issue alone we have spent almost 18 months of management time and tens of thousands of pounds on expert advice in order to try to reduce our VAT liabilities. The situation is ridiculous as we have already been told that we must pay back to the Government a large proportion of the grant in aid that we received from the Government. It is truly Gilbertian and I hope that tonight the noble Lord, Lord McIntosh, will find himself also the Minister for joined-up government in the land of Titipu.

6.12 p.m.

Baroness Thornton

My Lords, I welcome the opportunity to participate in the debate and I congratulate the noble Lord, Lord Freyberg, on initiating this important discussion. There are a number of reasons why the issue is important.

The Labour Party has a longstanding commitment—one which dates back to its inception—to make culture and the arts accessible to the people. In more recent times, since the general election in 1997, that commitment has expressed itself in several ways. The first was the action announced in 1998 by my honourable friend the Secretary of State to abolish museum and gallery charges over a three-year period. But, as a Labour Government, we have had at the core of our programme a commitment to deal with social exclusion. Indeed, several of the reports produced by the policy action teams have referred to cultural poverty, the lack of access to the arts and its impact on the quality of life for people on low incomes. Finally, reference should be made in the debate to the priority which we as a party and government have placed on education and raising standards.

All of that might lead one to believe that the question to be answered is how the Government make it possible to abolish museum and art gallery charges rather than whether it is possible. Everyone must welcome the abolition of charges for children and the fact that within the next few days pensioners will cease to pay. None the less, it still costs £28 for two adults to take their children to the Natural History Museum and the Science Museum in one day, as I did myself not so long ago. These charges can and do act as a barrier. It would be a great shame if, for the lack of imaginative solutions, political will, a row between departments of state or whatever, some museums and art galleries find it impossible to abolish charges.

I have a particular affection for the Museum of Scotland—I hope that my Scottish colleagues will forgive me for mentioning it—and its wonderful new wing which was completed and opened by the Queen in the past year. It is a beautifully designed building, offering imaginative and exciting exhibitions. My family enjoy gang there on every occasion we visit Edinburgh.

The director of the Museum of Scotland and many of his fellow directors want to abolish admission charges. During the weekend, he was quoted in the national press as saying that if the Government agreed to the proposal he would reconsider free admission to his museum. As a result of the significant cost of the recent building works at the Museum of Scotland, if it were to abolish entry fees it would be liable to VAT on its building works which would run into millions of pounds.

I am aware teat the Museum of Scotland is the responsibility of the devolved Scottish Parliament, but VAT is the responsibility of UK-wide statute. It seems very unlikely that the Scottish Parliament will be willing or able to make available funds to meet such a large shortfall.

I am really puzzled and ask my noble friend the Minister to use his best endeavours to solve the problem. I know that, being the cultured man that he is, he must be sympathetic to the situation. I beg him to try to make sense of why bodies providing a public service funded out of taxation must use that money to pay tax. Surely, it is for that reason that bodies such as the BBC are already listed in the schedule and are therefore exempt.

The particular relevance to museums is that the current policy of VAT rules create a big financial incentive to charge for admission. A charging museum such as the Museum of Scotland is able to reclaim the VAT which it pays and so has no incentive to change. The VAT reclaimed is often greater than the income generated by ticket sales. That does not make sense to me. What appears to be happening here is that the Government's VAT regime provides a strong financial reward for doing something which restricts access and use to museums and is against government policy.

One answer might be to increase grants to the museums and art galleries to enable them to overcome the immediate VAT problem, but that will merely increase the amount given out in grants to take back in VAT. It would also put a questionmark over all new capital projects, new exhibitions and developments of any kind. I know that my honourable friend the Minister for Museums has put together a powerful case for change. The noble Lord, Lord Freyberg, has also done so. I hope and trust that my noble friend the Minister, who carries briefs for both departments, will be able to use his good offices and good sense to help us make progress on the issue.

6.18 p.m.

Baroness Hooper

My Lords, I, too, thank the noble Lord, Lord Freyberg, for introducing the debate. In doing so, he is doing a splendid job in carrying on the battle from Lord Clancarty, who we greatly miss on these occasions.

I was shocked to read in this week's edition of The House magazine that I am one of the few Conservative Peers remaining who is a member of a government quango. That may be because the board of trustees of a museum is not my idea of a quango. It may he because the job is entirely unremunerated. It may al so be because I fondly believed that I was appointed for my strong Liverpool connections and my interest and involvement in arts and heritage issues in the European Parliament, the Council of Europe and in your Lordships' House.

Be that as it may, for noble Lords who may not have read The House magazine, I declare my interest as a trustee since 1993 of the National Museums and Galleries on Merseyside. It is the only English national museum outside London which consists of eight separate parts, including the famous Walker Art Gallery, a fine maritime museum and a new conservation centre, which is unrivalled elsewhere, not only in this country but more widely in Europe.

The general arguments in favour of extending Section 33 of the VAT Act 1994 to include national museums and galleries have already been well made.

I support the arguments, especially those advanced by the noble Lord, Lord Strabolgi, who has long been the champion of this particular VAT issue, and also those of the noble Lord, Lord Gibson, who has such expertise in this field. But I believe that all noble Lords have put forward the most convincing arguments in support of the Motion of the noble Lord, Lord Freyberg.

It may serve to illustrate the issue further if I explain our experience in Merseyside. Two years ago, the trustees of the National Museums and Galleries on Merseyside were forced, most reluctantly, to introduce charges because of diminishing government funding and ever-increasing costs. We pitched the charges at a very low level: at £3 for what we call "an eight pass", which entitles individuals to visit each of the eight separate parts of our National Museums and Galleries, and also on a season ticket basis. We also introduced family tickets at £5, again covering the eight parts of the museums and galleries and on a season ticket basis.

Last year, we partially reversed that system of charging because we now offer free admission to children and old-age pensioners. That has been funded by the Department for Culture, Media and Sport and we hope that it will keep up that funding. However, if the numbers of old-age pensioners and children exceed 50 per cent of our total visitors, as has already been mentioned, we risk an inquiry by Customs and Excise and risk losing our VAT advantage.

Therefore, the income from the admissions policy has not been so very large. However, the significant factor for our cash flow has been that we can recoup some £½ million of VAT as a consequence of the charging. But we could be affected even more in the future. We have a "2001 project", as do many other institutions, but ours is intended to revitalise the Liverpool Museum and the Museum of Liverpool Life, as well as carrying out work in the Walker Art Gallery. That will enable us to display better many of our treasures which at present are not available to the public. However, it has involved fund-raising to the tune of some £34 million. Happily, we received a substantial grant from the National Lottery of some £24 million. However, the VAT amount that we would lose if we changed our charging policy would be some £6 million. That is a significant amount and reinforces the points made so well by my noble friend Lord Renfrew.

It must be said that, after introducing those charges, we believe that the number of visitors dropped by approximately 10 per cent, in spite of the low level of admission charges. I say "we believe" because direct comparisons are not really possible. The method of counting visitors prior to charging was perhaps not as accurate as it now is. However, for a Government who are keen on access and on bringing as many people as possible to the arts, any diminution in the number of visitors must be regrettable.

For all the reasons advanced in the debate, I very much support the terms of the Motion of the noble Lord, Lord Freyberg, in particular because the Treasury has the power, because it would not require primary legislation and because the cost can be identified and contained. I look forward to a sympathetic reply from the noble Lord, Lord McIntosh of Haringey.

6.24 p.m.

Lord Wilson of Tillyorn

My Lords, like others, I feel a great sense of gratitude to my noble friend Lord Freyberg for his enthusiastic perseverance in this subject. Section 33 of the VAT Act does not sound like the most dramatic subject. It sounds rather dry and dusty. However, as noble Lords have pointed out, it is hugely important to those who are trying to run museums and galleries and trying to carry out the Government's avowed policy of free entry.

I must declare a non-financial interest as a trustee of the National Museums of Scotland. I believed that I might have had to crave indulgence from your Lordships to speak about matters north of the Border since the Motion refers to museums and galleries which are the responsibility of central government. However, I am reliably informed that in this context central government covers Scotland as well and includes institutions funded by the Scottish Executive through the block grant. Although we have one United Kingdom, we are capable of having more than one central government in this context.

In Scotland we have two institutions which are covered by the subject of the debate: one is the National Museums of Scotland; the other is the National Galleries of Scotland. One—the National Museums—charges, although not for children, and with special provision for pensioners; the other—the National Galleries—does not charge. The National Museums of Scotland, which is the area with which I am most familiar—and I very much appreciate the remarks made by the noble Baroness, Lady Thornton, about the splendid new Museum of Scotland (that is absolutely true; it is terrific!)—have been affected in very much the same way as have other museums, for example, in Wales, as noble Lords have pointed out. The number of our visitors went down by approximately 30 to 40 per cent when we started charging, although there has been some upward movement since the Museum of Scotland was opened because it is so attractive.

However, the key point that I wish to make with regard to finances is that on ticket sales the National Museums of Scotland receive some £550,000 a year, not counting expenses. But with regard to reclaimed VAT, the museums receive approximately £800,000 a year, which is considerably more. Behind those figures is the even more significant point that on building projects the VAT charges can be enormous.

It is at that point that I believe that we move out of the Gilbertian situation into something more akin to Alice in Wonderland. The problem is not simply that at the end of, let us say, February, one says, "We have enough children who are coming in free. OK, no more children until the next financial year". It is that one simply does not know what the rules will be. If, for example, the National Museums of Scotland now follow government intention in Scotland and stop charging, at some point will Customs and Excise say, "Well, you never really were a genuinely commercial organisation. By the way, some of the VAT that you reclaimed on the building of this new museum will now go back to Customs and Excise"? It is that issue—the Alice in Wonderland element—which makes it so difficult and which makes it necessary for so much time and administrative effort to be put into this particular point, rather than what the museums and galleries really want to do.

I mentioned the National Galleries of Scotland and I am sure that the noble Lord, Lord Gordon of Strathblane, who is a trustee, will want to speak about that. It seems to me that, looking at it from a sister institution, it is a classic example of the problem. It is a non-charging institution. Therefore, it cannot claim back money from VAT. However, more significantly, it, too, has a wonderful project—the Playfair project—to re-do the old Royal Scottish Academy and to link that with the National Gallery and to do many things which are greatly to the benefit of people in Scotland. However, I gather that it could suffer a VAT charge of up to £3 million, and it will have to so structure the project that there will be the maximum number of commercial things going on so that they can then reclaim the maximum of VAT. That seems to be a classic example of the circular problem that we have got into. That project will be partly funded by the Scottish Executive as well as by the National Heritage Lottery Fund.

So in effect, the Scottish Executive will be providing money and another part of the overall government system will be taking back the money. It is a classic case of the Government giveth and the Government taketh away, but there will be precious few people who say, "Blessed be the name of the Government", unless and until—and I hope the Minister can tell us this—they are able to sort out that contradiction. I am sure that, in that case, all of us who are interested in this matter will give a very considerable cheer.

6.30 p.m.

Lord Morris of Castle Morris

My Lords, before I say anything on this subject, so eloquently introduced by the noble Lord, Lord Freyberg, I must declare my sundry and manifold interests in the museums of the United Kingdom. I was a member of the Museums and Galleries Commission, may it rest in peace, for more than 15 years and chairman for five. I am currently deputy chairman of the Trustees of the National Portrait Gallery I have been a vice-president of the Museums Association and I have been on the Council of the National Museums of Wales and so on. All those appointments have one thing in common: they never paid me a penny.

So it is with a pure heart and humble voice that I can speak about the acute problems caused by what appears to me essentially a simple interdepartmental squabble. For it is surely absurd that the Government's own policy on free access, fostered and nurtured by the Department for Culture, Media and Sport, should be blocked and blighted by Customs and Excise.

Let us take the case of the National Portrait Gallery, a small but highly prestigious and eminently successful national gallery. For over 100 years it has been exemplary as a non-charging public institution, freely and democratically open to everyone. Except that I hat is not quite true. I must confess that there was one brief and disastrous episode in 1973–74 when, against all our instincts, we bowed in the house of Rimmon and obeyed the requirement of the government then in power under Sir Edward Heath. We paid dearly for our pusillanimity as we put on the required admission charge, raked in the pennies of the poor and watched our visitor numbers plummet. Fortunately, it was not long after that that the Heath government failed to maintain the confidence of the country and we were able to drop our admission charges and return, duly penitent, to the paths of righteousness.

But for the NPG it was a salutary experience and we shall not do it again. We survived the Thatcher years without charging for admission and in 1997 we hoped for better days. And our hopes were not dashed when the present Government espoused the policy of free access for all. But its faithfulness to that policy has cost the NPG dear. Its current grant-in-aid is £5.115 million. We calculate that unreclaimable VAT costs us approximately £300,000 per annum.

That money goes straight back to the Treasury, whence it came, in that "circular transfer" roundabout. That sum is the equivalent of mounting two major exhibitions a year of the style, status and popularity of the current exhibition of the photographic work of the noble Earl, Lord Snowdon, which has attracted some 30,000 visitors in its first four weeks, or our recent Cartier-Bresson exhibition which brought in thousands who would never otherwise have dreamt of entering our doors.

Alternatively, £300,000 would meet the cost of late-night opening two days a week. That is a development which successive Ministers have urged upon us, from the noble Earl, Lord Gowrie, who never tired of commending to us the example of Buffalo, USA—which seemed, like Arkwright's shop, to be "open all hours"—to the present incumbent, Chris Smith, who would equally like to see us "alight at night". We would love to accede to their requests, if only we did not have that running sore of £300,000 per annum to deal with.

If we considered only the most urgent needs of our own institution, £300,000 would cover the annual cost of our conservation and collection management programmes. Again, we worry continually about maintaining our academic and scholarly standards and £300,000 would fund four years of cataloguing our photographs and reference collections. For £300,000 we could undertake the re-display, urgently needed, at our outstations at Bodelwyddan and Beningbrough. But none of that can be done so long as the VAT bill lands on the director's desk.

This matter goes far deeper than a mere spat between government departments. The principle of free access to our great national collections in England, Northern Ireland, Scotland and Wales must be reaffirmed and reasserted and properly funded.

As evidence of the importance of free access to the cultural health of our nation, I offer the example of Professor Margaret Gowing, a trustee of the NPG and other museums, who died in November 1998. She was a London girl. The poverty into which her family sank when her father died of tuberculosis left a lasting impression on her. She later became Oxford's first Professor of the History of Science and was one of the few scholars who were fellows of both the Royal Society and the British Academy. One obituary of her states that, she took full advantage of the experiences that London offered a poor child, and it is her memory of the benefits of free entry to national museums that fired her anger at the introduction of charges at the Imperial War Museum (from whose Board of Trustees she consequently resigned)". Thank God she did not have to resign from the Trustees of the NPG. The NPG is one clear example of the necessity of this change.

Amendment of Section 33 seems a sensible way forward. If my noble friend, in his reply, shows that the matter cannot be resolved in that way, I hope that he will suggest any other way he may know or at least promise to leave no bureaucrat unbothered and no civil servant unharassed until we rid the great national museums of that impediment, that albatross around the neck, that ball and chain around the foot and, in this matter at least grant them, a happy issue out of all their afflictions".

6.38 p.m.

The Earl of Dundee

My Lords, I join others in thanking the noble Lord, Lord Freyberg, for initiating this debate. There is a strong case for what he proposes. Not least is that so in the light of the background to the Question. The Government gave a commitment to encourage free admissions to national museums and galleries. If in so doing the Government had provided two other related assurances, then, of course, there might have been no need for this debate today: the first necessary assurance is compensation to museums and galleries for loss of income from charging; and the second is compensation to them for their loss of business status and recoverable VAT.

Such assurances from the Government may be intended. As yet, they have not been properly given. Nor is it even clear that the Government still uphold their earlier commitment to free admissions in the first place. No doubt there have been statements of intent to promote free admissions to children and pensioners. However, to go no further falls far short of their earlier commitment to free admissions for all.

Therefore, the first question is whether the Government are still committed to free admissions for all and, if not, why that commitment may have become watered down.

Secondly, if it may have been altered and the original government commitment to free admissions for all has thus been replaced by a compromise government policy of free admissions for some only, what plans do the Government have for the administration of compensation? Under a scheme of partially free admissions, how will museums and galleries be compensated for loss of income from charging and for loss of VAT recoverability?

That leads in to the case of the noble Lord, Lord Freyberg. His proposed solution offers two key benefits. The first is consistency between the cultural aim of free admissions and the fiscal rule of no VAT recoverability without business status. Extension of Section 33 of the Value Added Tax Act 1994 to national museums and galleries provides the accommodation. Yet one allegation against the proposal is that its accommodation would invite a challenge from Europe. However, that is not so. We have already heard today of the EC statement which construes the accommodation as a relevant subsidy.

The fear has also been expressed that the extension of Section 33 to museums and galleries would then have to apply to many other institutions and charities as well. That is surely a groundless fear. Owing to their status, national museums and galleries may easily be classified and restricted as sole beneficiaries. Then a specious differentiation is attempted between institutions such as local authorities, the BBC and ITN to which Section 33 currently extends and national museums and galleries to which it does not as yet extend. The claim is that the differentiation is valid since local authorities and the BBC may raise taxes, levies and so on, while national museums and galleries do not. Nevertheless, as has been said, national museums serve the whole nation. They and their collections are for the long term. Their financing is for the public good. Thus, attempted disqualification against them and differentiation between them and other public institutions to which Section 33 now extends reflect rather narrow and specious reasoning.

That connects to the second main benefit which the proposal of the noble Lord, Lord Freyberg, offers. This assists the Gilbertian predicament to which my noble friend Lord Renfrew referred and it illustrates the unhappy and circuitous tale of Dear Lisa's bucket. The Government may now say that the hole in the bucket of the free admissions commitment is that of the difficulty of administering compensation for loss of VAT recoverability. The Government may now say that it is thus better to compromise or drop free admissions rather than confront a particular administrative obstacle or technicality.

Fortunately, the noble Lord, Lord Freyberg, and others are good workmen. They can enable the Government to keep their word on free admissions. And their remedy can prevent the degeneration of a solid bucket of commitment into a misleading flash in the pan of unreliability.

6.41 p.m.

Lord Gordon of Strathblane

My Lords, I join others in congratulating the noble Lord, Lord Freyberg, on introducing the debate, but rather more on introducing such an elegant solution to a problem with which clearly previous governments, as well as this one, have wrestled. At this moment, short of some deus ex machine by my noble friend Lord McIntosh, it is game, set and match for the proposal.

Since I interpret—as did the noble Lord, Lord Wilson—the phrase "central Government" to include the devolved Scottish Parliament, I must properly declare an interest as a trustee of the National Galleries of Scotland. Unfortunately, I share the fate of my noble friend Lord Morris, in that it is an unpaid occupation and therefore I derive no commercial benefit from the case which I am advancing. But I readily admit that the National Galleries of Scotland would benefit to the tune of about £225,000 per year on running colts if the proposal were adopted. Significantly more importantly, however, as the noble Lord, Lord Wilson, pointed out, is that they currently have an ambitious programme to develop the Royal Scottish Academy building, known as "the Playfair project", the costs of which are in excess of £20 million. The savings on VAT on that project would be extremely substantial.

Like my noble friend Lord Faulkner, I refer to the many roles played by my noble friend Lord McIntosh in this House. Indeed, glancing down the Order Paper, in all four debases which may occur on the matters confronting us during the remainder of the day, my noble friend Lord McIntosh has a starring role. Such versatility can be only envied. However, I do not envy him the dilemma of being the Government's spokesman in this House for both the Department of Culture, Media and Sport and the Treasury. I do not wish to induce any schizophrenia in my noble friend, but joined-up government can go only so far. He must decide at some point which side of the fence he is on. I suspect that we shall receive a more sympathetic reply from my noble friend Lord McIntosh as spokesman for the Department of Culture, Media and Sport.

What we are all arguing for here is consistency. At present, the museums and galleries which charge for admission and are therefore out of sympathy with government policy have the benefit of reclaiming almost all their VAT. The museums and galleries which, in sympathy with government policy, do not charge for admission lose out. One might believe that the main benefit of charging is the cash that one draws out of the till from admission charges, but it has been estimated that at least half the benefit is the ability to recover VAT. We are therefore currently disincentivising museums and galleries to endorse and embrace government policy.

At present there is a clear inducement to galleries to charge and a penalty on those which do not. The Government must make up their minds which is more important: £3.1 million of lost VAT revenue to a Treasury which, through its sound management of the economy, is doing rather well in terms of receipts, or the fulfilment of the Government's policy on free access to museums and galleries. Unlike my noble friend Lord McIntosh, I do not hold any briefs, but in the overall scheme of things I should think that fulfilling the obligation and the promise to try to achieve free access must take precedence over a mere £3.1 million in VAT.

Let us consider also the number of institutions—it is almost embarrassing—to which Section 33 already extends: police authorities; the BBC; ITN; river purification boards; internal drainage boards; port health authorities; not quite Uncle Torn Cobbleigh and all. Adding in museums and galleries would be entirely consistent with what the Government wish to do. The noble Lord, Lord Freyberg, has produced a Motion which would remove one of the main obstacles to national museums getting rid of admission charges and would therefore eliminate the present conflict between the Government's taxation policy and their cultural policy. It would ensure that the loss of revenue to the Treasury is measurable, because the proposal is clearly ringfenced and contained. The estimated loss would be £3.1 million. It would have a direct and significant impact on the museums' delivery of public service.

At the moment, a great deal of management time and money is spent on trying to avoid paying VAT by doing all kinds of things which museums do not particularly want to do, but by which they can save the payment of VAT. That produces also a distortion of management decisions. The proposal would clearly protect the Government from any repercussive effects of a further extension of Section 33. As has already been mentioned, it would be acceptable to the European Commission. Above all, it is extremely easy to achieve. My understanding is that it can be achieved by Order in Council subject to a negative resolution and it would be easy to administer. For all those reasons, I hope that my noble friend Lord McIntosh, when he comes to reply, will feel that he is speaking for DCMS rather than for the Treasury.

6.47 p.m.

Lord Crathorne

My Lords, speaking at the end of a single-issue debate such as this, I can say without fear of contradiction that virtually everything on the subject has already been said. As a result, I can be extremely brief. The Government's laudable, although perhaps utopian, commitment to free entry to museums seems to be under some real threat. Therefore, they should welcome the suggestion of the noble Lord, Lord Freyberg. We all greatly thank the noble Lord for the opportunity to discuss the matter.

It is interesting that as the last speaker on the list I follow a group of noble Lords who have been in entire agreement in different ways and with slightly different reasons. There has been no dissent about the suggestion being a good one. The case for extending Section 33 has been well made. There is no need to repeat the arguments. By accepting the case, the Government would clearly help the national museums and galleries for which they are responsible.

Furthermore, there is a real threat that if VAT charges to those museums and galleries which do not charge cannot be reclaimed, some of those museums may be compelled to charge in the future. That runs totally and absolutely counter to the Government's commitment to free entry.

I particularly look forward to what the Minister has to say about the problem of children and pensioners. That seems on the face of it a real problem; if over half come in free to a museum, will Customs and Excise say, "Well, you're no longer a business and so you can't reclaim VAT"? It certainly would have a devastating effect.

As a number of your Lordships have pointed out, I am sure that the Minister will want to do all that he can to ensure free entry to museums and galleries. He will do that wearing his DCMS hat, but I daresay the Treasury may have found some way of preventing him being overly helpful to the cause of free entry, even though the Treasury of course has the power to add to the list of bodies identified under Section 33 without primary legislation and even though a number of bodies are allowed to recover VAT that is incurred, despite not being businesses.

In this category will fall most particularly the numerous local authorities which have museums and galleries in their care and which open free. They can reclaim VAT. I hope that the Minister has some good news for us this evening but, if he has not got some good news, I urge him to please "keep on the case". That was a point made much more eloquently by the noble Lord, Lord Morris of Castle Morris. I hope that the Minister can find a way of allowing museums and galleries to reclaim VAT. If they cannot do that the consequences could greatly affect free entry, a cause which is so dear to the Government's heart.

6.51 p.m.

Viscount Falkland

My Lords, the plea put so eloquently before us by the noble Lord, Lord Freyberg, is narrow and precise: yet many contributions made by your Lordships have, quite understandably, gone way beyond the narrow confines of his Motion. I shall not, however, attempt to go down the paths already trodden by so many earlier speakers.

Let me say at the outset that I have looked very quickly through my own party's new arts policy, which has been rushed to me on the Bench, and see that our fundamental aim is very close to that of the Labour Party, although it uses slightly different words. We would make it a primary function of government to support the arts and to help to make them accessible to all. That echoes what I think the noble Baroness, Lady Thornton, said earlier. I do not think that the noble Lord, Lord McIntosh, will disagree with that.

We have had from various noble Lords a foretaste of what the noble Lord's reply to the debate may be and the difficulties in which he may find himself among the various functions which he performs so expertly. He is extremely versatile—so versatile that on one previous occasion he gave us a snatch of Gilbert and Sullivan at the end of an arts debate. One imagines that the noble Lord might be tempted to appear rather in the fashion of a music hall comedian, perhaps in a suit of which half is that of a tax collector and the other half that of a Minister for the arts and having an argument with himself.

Lord McIntosh of Haringey

My Lords, the noble Viscount should recall another song from "Iolanthe": "united we sing as one individual".

Viscount Falkland

My Lords, there you are! There is a very good example and a foretaste of the very good-humoured answer we are likely to get from the noble Lord, Lord McIntosh. I think he is probably going to answer us as a Minister for the arts, representing the DCMS. We shall have the advantage, with all his experience, of receiving his advice on how the matters before us can be resolved, if indeed they can be.

Many of your Lordships have described the situation before us in terms of Alice's Adventures in Wonderland or even as Gilbertian. The noble Lord, Lord Strabolgi, referred to that, but actually the situation is becoming almost Kafkaesque. We have a government who tell us that free admission and access for all is a prime aim, and we on these Benches agree with that. Yet here we have a situation which has moved on from the one we discussed some weeks ago—or was it days ago?—when the moneys available for free access were described as insufficient. Those museums and galleries which charge have the benefit of recouping their VAT, because they are adjudged to be a business. Those that do not charge—and many of them have grants from various sources as well as from lottery funds—and have great plans will find that their VAT bills are enormous. They will be crippling.

That is the extraordinary position in which we find ourselves. I find even more extraordinary the Kafkaesque prospect that if this situation continues there will be arguments with Customs and Excise, and the uncertainty that brings, about partial free admissions, as has been mentioned by other speakers. Following the Imperial War Museum case, where it was accepted that it was possible that some visitors who came in free of charge did not materially affect the position, we have been given fair notice that Customs and Excise will now look very carefully at what museums and galleries do by way of mitigating their position. That may prove very difficult. The noble Lord, Lord Renfrew, asked from his experience whether it was desirable for museums and galleries to be spending all this time worrying about VAT, rather than getting on with what they should be doing: namely, providing excellent quality services for all, particularly for young and underprivileged people, throughout the country.

It seems an extraordinary situation because anyone who cares for the arts—a Rip van Winkle if you like, and here I have introduced yet another level of a Winkle-esque situation—who arrives here and discovers this state of affairs will wonder what kind of a country they have arrived in. If they arrived in France or Germany they would find a very different situation, because in those countries they spend almost double what we spend in terms of taxation moneys on the arts.

This whole situation is set against a background which is familiar, even in local government areas where museums and galleries come within the mechanism of Section 33 of the Value Added Tax Act. Within the English local government finance system the arts are not classified separately and are not taken into account separately in applications for revenue support grant. Is it surprising, therefore, that arts provision across the board, let alone from museums and galleries, is extremely patchy?

It is against that background that you get departmental squabbling, as the noble Lord, Lord Morris, described it. I do not think there is any squabbling: I wish there were, and I hope that the noble Lord will tell us that there is squabbling.

The other evening, together with parliamentary friends, I went to a presentation in another place which was organised by the All Party Group for the Arts in London, at which the mayoral candidates were quizzed on their plans for the arts. I myself asked a question on this very point, and the only satisfactory answer I had—satisfactory to me because it was robust—was from Mr Dobson. Mr Dobson made a colourful comparison: he said that in the Wild West—and this is why I shall put a cross somewhere on the paper for Mr Dobson in the forthcoming election—people settled matters with bullets, but we are parliamentarians He went on to say that it was outrageous, and that the Government would settle this by using legislation. I like that approach. Perhaps the Minister will be able to tell us whether that will be possible. I hope that it will be possible, because this situation cannot continue.

In preparation for this debate, I have tried to explain the issue to several friends, including some who know the arts. Their reaction has been to open their mouths in amazement and say, "That is ludicrous!".

Perhaps I may make one more specific point. What consideration has been given to the wishes of those who, over the years, have made bequests to museums and galleries, or those who will do so in the future? Almost without exception, such bequests are tied to the prospect of free admission for all. This situation runs absolutely counter to the wishes of those who make bequests. The Mahon bequest illustrates the problem.

If there is another way of dealing with this matter, I hope that the Minister will tell us. After attending a briefing, I understand that the European Union is not bothered about it and is willing to leave the matter entirely in the hands of the UK Government. For that reason, I hope flat the Minister—without singing another aria in this Gilbertian situation—will be able to cheer us. Unless a sensible approach is adopted, the day-to-day situation looks dire for those who have to deal with it on that basis.

7.1 p.m.

Baroness Anelay of St Johns

My Lords, I, too, thank the noble Lord, Lord Freyberg, for giving us the opportunity to discuss the vexed issue of VAT rules and how they inhibit the ability of trustees to abolish entrance fees for museums and galleries. I was interested to hear about the situation from the points of view of my experienced noble friends Lady Hooper and Lord Renfrew, as trustees respectively of the Merseyside Museum and the British Museum. They told the House about the many problems involved in administering the system.

From what we have heard in today's contributions, it is certainly apparent that the Government have not so far thought through the full impact of their policy on free access. I doubt if I shall be as generous as the noble Viscount, Lord Falkland, and absolve the Minister from answering on behalf of the Treasury. I remind noble Lords that in this House, unlike in another place, Ministers answer for the Government. However, I am sure that the particular Minister on the Front Bench tonight will be able to do that perfectly well.

This problem was raised some 15 months ago by my noble friend Lord Montagu of Beaulieu. In December 1998, in a Starred Question, he asked the Government whether the VAT implications in this matter had been worked out. The answer from the Minister was something along the lines of, "We are still talking about it", or more accurately, "We are in negotiations on this point". Yet we are no further forward. I also note that when the Government talked then on the subject of free access, they did mean free entry.

However, I noticed that in the speech of my noble friend Lord Dundee he sought a commitment from the Government that their policy remained that of free entry for all. I shall listen closely to the response of the Minister on that point. That is because over the past year or so that I have held this brief I have noticed that the Government talk about free entry, free access, wider access and keeping free those museums currently charging nothing. The policy seems to ebb and flow. I have heard the Government say that they have not really ever pledged—either before the election or in the manifesto—to provide free entry for all to museums. For that reason, I shall be interested to hear what happens tonight.

Whatever the semantics of the matter—and others have referred to semantics tonight—the fact is that throughout these discussions the Government have made the public believe—this is important—that they would introduce free entry to all national museums and galleries. I shall refer again, as I did two weeks ago when this subject was debated, to a Department for Culture, Media and Sport press release from 24th July 1998 in which the Government referred to, "universal free entry in 2001". However, only in February of this year, during Question Time in this House, another variation was made on the theme in response to a Question tabled by the noble Viscount, Lord Falkland. The Minister described what he called the "wider sense of access" which, includes the ways in which museums and galleries can improve the presentation of their collections and improve the hours in which they are made available; it includes the publicity for them: and it includes the way in which they are extended to the wider world outside museums and galleries". He then went on to say, It is that wider sense of access about which the Government are most concerned".—[Official Report, 21/2/00; cols. 7–8.] If the Government are "most concerned" about the wider issues of access such as publicity and so forth, surely the corollary of that is that they are less concerned about free entry. We then have cause to question how great is their commitment now to the more obvious form of access so far as concerns the public: that is, simply free entry.

As we have already heard, the VAT anomaly bedevils trustees' attempts to give free entry for all. Both tonight and two weeks ago the noble Lord, Lord Freyberg, has explained very clearly that the National Art Collections Fund recommends what appears to be a straightforward and comprehensive solution to that problem: Section 33 of the Value Added Tax Act 1994 should be amended. I look forward to hearing whether the Government accept this as a solution and, if not, why not. Earlier in the debate my noble friend Lord Crickhowell posed certain forensically detailed and powerful questions about the operation of Section 33, in particular as regards the difference between a levy and a tax. I look forward to hearing the Minister's replies to those questions.

Over the weekend reports in the press stated that the Government intend to reject the recommendation of the National Art Collections Fund and to adopt a compromise procedure; namely, the introduction of free periods of entry to museums for everyone, or perhaps free entry commencing next year only for those adults of working age claiming state benefits. What advice have the Government received about whether this kind of development would provoke a challenge from Customs? Several noble Lords have highlighted all the difficulties that could arise.

Last week the NACF kindly provided a briefing session for interested Peers. As it pointed out, if the balance between paying and non-paying visitors tips too far towards the non-payers, it throws into question the level of "business activity". In short, the more that charging museums move in stages to a complete free admissions policy, the more likely they are to encounter a non-business challenge from Customs. The NACF says that this will result in greater financial uncertainty and lead to disputes and possibly litigation, all of which would have a significant impact on museum and gallery management costs and resources.

Today the three Ministers from the Department for Culture, Media and Sport—and I say that advisedly because I think that it is a disappointment that someone of the Minister's ability is only a spokesman for DCMS—are all over the place, both geographically and figuratively. They are visiting St Ives, York and Liverpool to mark the start of free entry for pensioners which comes in at the end of this week. But, as several noble Lords have mentioned today, is the Minister aware that Customs and Excise has already advised that the introduction of free entry to pensioners is in itself likely to tip the scales against museums and make them fall into the category of non-businesses? My noble friend Lord Crathorne drew careful attention to this problem. Such a move would force museums to lose their rights to VAT reclaims. If that happens, will the Government compensate them for that loss, because they would have caused it?

I was intrigued by the reference made by the noble Viscount, Lord Falkland, to last Monday's meeting of the All-Party London Arts and Culture Group. I, too, listened with interest to what was said at that meeting. I do not often quote Labour candidates, but I should like to do so as well. I took a careful note. The official Labour candidate said that he is "fanatically in favour" of free entry to London museums. He said: The idea that some preposterous quirk in the VAT law should stop it is barmy". He does not mince his words. But, unlike the noble Viscount, I shall not be putting my cross against his name. I cannot quite go that far. Having heard the debate, I wonder whether on this occasion the Minister will be able to announce a change in the law and make Mr Dobson's day.

7.10 p.m.

Lord McIntosh of Haringey

My Lords, today's debate has been a splendid cry of support for more funding for museums and galleries, and for wider and free access. We should all be grateful to the noble Lord, Lord Freyberg, for that.

I am grateful to the noble Baroness, Lady Anelay, for finally reminding the House that I speak for the Government and not specifically for the Treasury or for the Department of Culture, Media and Sport. If I were to stand at the Dispatch Box and speak on a sectoral basis for a particular department and run the risk of someone else standing up and saying something different on behalf of another department—whether it should happen to me or to anyone else is not important, despite the relatively friendly teasing I have endured this evening—I would say that this Government are all over the place. That is not the case.

The published subject of the debate is VAT and national museums and galleries. However, I think it is fair to say that the thrust of the debate has, quite properly, been about levels of public funding for museums and galleries. If that is the case—I believe it to be not only true but desirable—then we should talk about net levels of funding: the funding that goes to museums and galleries.

Noble Lords should not assume that we in government are fools and that we do not think about the implications of taking money back in VAT from any public service, be it museums and galleries or anything else. If it were not the case that, at all times since the general election, those in the Treasury, Customs and Excise and the Department of Culture, Media and Sport had been fully aware of the VAT implications of free access, we would be properly worthy of criticism. But of course we have always been aware of the implications; we have always been conscious that the net funding, the net burden on the public purse, is the proper consideration.

However, having said that, let me set out our views—they have not changed—about wider and free access, about the nature of VAT itself and the problems we face in trying to define who should or should not pay VAT. I should like to look at some potential solutions and then specifically at Section 33 of the VAT Act 1994, its history, the principles of preception on which Section 33 is based, the European dimension and the issue of precedent, which other people call by the more emotive name of "floodgate". I should then like to reach some kind of conclusion.

First, let me say about free access what I think your Lordships know. Funds have been available to permit free access for children since April 1999—and will be available for free access for the over 60s from 1st April (this coming Saturday)—to the currently charging national museums funded by DCMS. We are continuing to assess the most effective ways of enhancing access in 2001, and we shall make an announcement on that in due course. On that, I do not intend to make any advance or retreat from previous policy. I am simply repeating what has been the position for a very long time.

Free access for children has been very successful for those museums which previously charged. To the end of January, visits by children were up by 18 per cent. As the noble Baroness, Lady Anelay, said, free access for the over 60s is being launched today by the Secretary of State at the National Railway Museum in York and by other Ministers in St Ives and in Liverpool. We have also provided the funds to allow the currently DCMS nationals to stay free.

I welcome what the noble Viscount, Lord Falkland, said about Sir Denis Mahon and his recent bequest of his wonderful collection of Italian baroque paintings. Some time ago, I was sent to Bologna to—it is impolite to say— "schmooze" Sir Denis Mahon; to assure him that he was safe in leaving his paintings to our national museums and galleries. He was and is determined that they should go only to museums and galleries which have free access, and I and other Ministers have been able to assure him that that will continue to be the case. He has accepted, correctly, those assurances, and he has made the bequest to which the noble Viscount referred.

In addition to that, the Secretary of State has announced that Tate Modern at Bankside will have free access for all when it opens. It is probably the most wonderful, largest, new art gallery in this country for the whole of the last century. An additional grant of £5 million is being paid to the Tate Gallery this coming year, and £6 million next year for that purpose. So our commitment has not changed; it is as firm as it ever was.

VAT of course is a potential obstacle to extending free access. We understand the concerns that it may limit our future freedom of action and may even threaten the free access already available. We have always been aware of the VAT implications of the free access policy—especially at a time when many national museums and galleries are carrying out major capital developments mainly funded by the National Lottery—and we have continually been in contact with Customs and Excise to try to address any VAT problems.

But this is not an anomaly of VAT—this is VAT. This is what VAT is about. The burden of VAT is intended to fall totally on the final consumer, either private individuals or organisations which are not in business. The admission of people to premises for a payment is a business activity, but free admission is not. Museums which charge for admission are generally in business—some have non-business activities such as free academic research—and they can recover all or nearly all of the VAT they incur. Museums which do not charge for admission, or which have substantial numbers of free admissions, usually have some business activities—such as shops, cafes or special exhibitions—which entitle them to recover some VAT. However, they cannot recover VAT relating to their non-business activities. The additional grants to museums which abandon charges are unlikely fully to off-set the VAT cost. The NACF perceives this as an inducement to museums to charge, while those which offer free admission suffer a heavy financial penalty.

Of course I recognise the concern that the situation is worse because all museums are currently incurring a lot of VAT because of National Lottery capital projects. But it has always been the case that VAT can be included in the grant request to the National Lottery. If the VAT has not been included in the grant request for a project which is liable to VAT without it being recoverable, then the grant request has not been properly made. It is of course true that free admission can mean that some VAT cannot be recovered. This is a complex issue. It depends very much on the museum's individual circumstances and it is subject to negotiation between the museum and the local VAT inspector.

Before leaving the question of lottery grants, I should say to the noble Lord, Lord Renfrew, that the figures that he saw in my Answer to the noble Lord, Lord Freyberg, are the figures provided for the British Museum. They have not been inspected or verified by Customs and Excise. That is the basis on which they have been given. One noble Lord said that this is a lottery. It is not. The local VAT inspector deals with his local museums and galleries, not because he is a kind of free-standing baron able to negotiate as he thinks fit, but because the needs and circumstances of museums and galleries are different one from the other. Customs and Excise is concerned with equity rather than equality, and it will be directing the approach taken by local officers to ensure that the same basic principles are followed.

Let us look at what potential solutions there might be. We could treat non-charging museums as being in business so that they can recover all or most of the VAT they incur. However, in both UK and European Community law business involves making supplies for a consideration; and any change to that would mean amending the sixth directive. To amend the sixth directive I have to say, frankly, is all but impossible at least in the foreseeable future. Only the Commission can propose legislation, so anyone suggesting a change to accommodate museums would need to convince it, first, that there was a problem and, secondly, that there is a solution which is consistent with the basic scheme of the tax. This is not a cascade tax; it is a tax on the ultimate consumer; and, frankly, we are unlikely to overcome the first hurdle.

Another solution is that of the National Museums and Galleries on Merseyside to which the noble Baroness, Lady Hooper, referred: admission at a reduced cost. Customs and Excise has confirmed that, provided museums make more than a token charge for admission, reduction of the charge should not significantly affect their VAT recovery.

Finally, there is the proposal, the subject of the debate, to include national museums and galleries within Section 33. That is considered to be a quick and easy method for national museums and galleries to recover tax which they cannot otherwise claim. Of course, we are grateful to the National Art Collections Fund for the paper it produced with the help of the Charities Tax Reform Group, and for the approaches it has made to the European Commission.

Let us look at the history of Section 33. It is part of the original 1972 VAT legislation. It allows certain bodies to reclaim tax incurred on their purchases used in carrying out their non-business activity. But apart from exceptions like the BBC which was introduced at the very beginning, this status has been restricted to local authority-type bodies with legal powers directly to precept on local taxation—not local authority museums, I have to say to the noble Lord, Lord Crickhowell, but local authorities—for all their services. If I said to him that they levied charges and not taxes, I was almost certainly wrong because that is not the implication. This is important because the total amount of VAT refunded in 1999 under Section 33 to local authorities was about £3.4 billion.

What about precepting as a determining factor for inclusion? The criteria for adding new bodies is that they carry out new local authority-type functions and have the power in law directly to precept on local authority funds. Since 1972 it is true that 33 bodies have been added by Treasury order. National museums and galleries cannot precept on local authorities and are unrelated to local authority funding requirements. These long-established rules have been strictly applied to many applications for admission from non-departmental public bodies, a category which includes our national museums and galleries and they have all been rejected. The Charity Tax Review Group has been in negotiation with Customs and Excise and has been firmly told that it cannot be extended to it.

Lord Crickhowell

My Lords, I thank the Minister for giving way. As regards ITN, the precepting is on Channel 3 providers; it is not on the local authorities. And in the case of the Environment Agency the precepting is not on local authorities. Surely these are the levying of charges and not precepting on local authorities. There are already exceptions, are there not?

Lord McIntosh of Haringey

My Lords, I said that there have been exceptions. They were all hard fought. For the ITC it was introduced at the same time as the BBC.

National museums and galleries simply do not meet the precept levying criteria and if they were admitted it would be difficult to apply a defensible yardstick to prevent entry to other non-departmental bodies. The VAT incurred by non-departmental bodies is about £400 million which is partly offset by central grants and business activity on which input tax can be reclaimed. The tax loss could be in the region of £50 million to £70 million in this area.

In the European context, yes, of course we are aware of the views which have been expressed by the European Commission. We do not dispute that part of the Commission may hold that Section 33 as framed at present is outside the terms of the sixth directive and European Community law does not cover it. But if it were to be considered as part of the law, which might be the case if there were an extension, then the Commission would take infraction proceedings against the United Kingdom. We have known this for a long time, but there is uncertainty to the extent that membership could be extended to the semi-commercial sector that could still prompt the Commission to take infraction action.

As regards setting the precedent—the floodgates argument—I have spoken of the cost regarding charities and the £400 million tax which could be at risk. The noble Lord, Lord Strabolgi, and many others said that the cost for the charging of museums and galleries would be £3 million. If we extended that to the non-charging museums and galleries we should be talking about £30 million. In any case, other non-departmental public bodies could well be pressing for similar treatment.

We are not stupid. This is public money. If the money is going out to museums and galleries and is being recovered in the form of VAT, you do not seriously think that the Treasury, Customs and Excise, and the Department for Culture, Media and Sport have not taken that into account not only in the way in which our VAT laws are framed but also in the way in which the size of grant for the DCMS is framed. A number of noble Lords have spoken as though this were somehow a quick fix. The noble Lord, Lord Gibson, said that there was no repercussive effect. Of course there is a repercussive effect. If we set targets for public expenditure in this country—and noble Lords opposite who have been Members of government know that I am right about this—in the knowledge that some of our expenditure is gross and sums are recovered in VAT, then we are looking at the net effect on public expenditure; and that is what we publish in our Budget figures. It is the basis on which the allocations in our spending reviews are based. Every noble Lord who has been a Minister must know that to be true

I do not say firmly and finally that there is no prospect of change in Section 33. We shall continue to look for the possibilities of change. I am not saying that there is no possibility that other ways may not be found of improving the funding of museums and galleries. After all, that is the subject of the spending round 2000 which is going on. But I have to say that anyone who thinks that there is a cost-free fix in changing the VAT law is deluding himself.

Noble Lords have done an excellent job for museums and galleries by their determined advocacy of free access and of the worth and means of museums and galleries. That cannot be taken away from them.

7.27 p.m.

Lord Freyberg

My Lords, I am immensely grateful to everyone who has spoken today. It has been an informative and lively debate. I am particularly grateful to the Minister for his comments and for explaining the Government's position. I am sorry that he is unable to move in our direction. I understand the purpose of Section 33. I see no logical and, with great respect, no legal basis on which to limit it I note that in 1984 when a Labour MP asked the Chancellor of the Exchequer in a Question for Written Answer whether the national museums and galleries should be put on the same footing as local authority museums under this very power, he was told by the Treasury Minister, Barney Hayhoe—now the noble Lord, Lord Hayhoe—not that it could not be done but, on the contrary, that no VAT refund was needed because national museums grants were designed to cover VAT. That is patently no longer the cage. The refund is now badly needed, not least in order for the Government to deliver their admirable policy of universal free access. Mr Hayhoe's answer clearly indicates that the Treasury at that time had no intention of declaring this power off limits. Indeed, it is extraordinary that many local authority museums have the benefit of this power, which is denied to their national colleagues.

Are the Government saying that they cannot add national museums to Section 33 or that they do not want to? As there do not seem to be any overwhelming objections, I urge the Government to find the political will to add national museums and galleries to Section 33. I beg leave to withdraw my Motion for Papers.

Motion for Papers, by leave, withdrawn.