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Farrer & Co | Charities, culture and VAT – the tale continues

Several years ago, the British Film Institute (BFI) appealed to the Tribunal against HMRC’s refusal to repay VAT that it had charged on cinema tickets. BFI argued that the films fell within the cultural services exemption of the VAT Directive. This exemption applied to "certain cultural services and goods closely linked thereto supplied by bodies governed by public law or by other cultural bodies recognised by the Member State concerned".

The Directive allowed Member States a transitional period in which to transpose its provisions into domestic law. That period expired on 1 January 1990, but the UK did not implement the cultural services exemption until 1996. BFI’s appeal related to VAT paid during this period. It claimed that it was entitled to repayment on the grounds that the exemption in the Directive had direct effect, that is, it could be relied upon by UK organisations even though Parliament had not yet incorporated it into UK law. It was eventually incorporated into the Value Added Tax Act 1994 (the 1994 Act). The UK version exempts the supply by "eligible bodies"of a right of admission to:

  • museums, galleries, art exhibitions or zoos; and
  • theatrical, musical or choreographic performances of a cultural nature.

The First Tier Tribunal agreed that the Directive had direct effect and the Upper Tribunal upheld this decision on appeal.

This generated more interest than the average VAT case because, if the BFI was correct, then the exemption was available to "eligible bodies" providing cultural services other than those listed in the 1994 Act (which does not mention cinema).

When HMRC appealed again, the Court of Appeal – mindful of the potential implications of the case – asked the European Court to determine whether:

  1. the words "certain cultural services" permit Member States any discretion in their implementation of the Directive and, if so, what discretion?
  2. the terms of the exemption, in particular the words "certain cultural services", are sufficiently clear and precise to apply by direct effect in the absence of implementing legislation?

Although we have not yet seen the judgment of the European Court, we have now received the opinion of the Advocate General.

On the first question, the Advocate General held that the phrase "certain cultural services" does allow Member States discretion, for two reasons. First, the use of the word "certain", rather than "all", indicates that not all cultural services were meant to be included. Secondly, the history of the legislation supports this interpretation. Initially, the plan was to draw up an exhaustive list of the cultural services subject to the exemption, but this was rejected because – the Advocate General implies – it would have imposed an unsuitably uniform approach to culture throughout the EU. Given that cultures within the EU vary a great deal, it is appropriate that Member States should have some discretion to determine which cultural activities should benefit from the exemption.

However, this discretion is not unfettered: the wording of the exemption makes it clear that it should only be available to bodies whose activities are directed to non-commercial ends, and the European Court has previously held that the purpose of exemptions is to exempt from VAT certain activities that are in the public interest.

It is settled law that provisions in a Directive can only be given direct effect if they are clear and unambiguous, so the Advocate General's answer to the first question made his answer to the second inevitable: since the Directive gives Member States discretion, it is not sufficiently clear and precise to be given direct effect.

There are still a couple of chapters left of this story – we have yet to hear the European Court's judgment and then we will have to await the verdict of the Court of Appeal when the matter is passed back to the English courts. Having said that, in the majority of cases the European Court follows the opinions of the Advocates General, so the happy ending that some cultural charities might have hoped for is now looking less likely.

If you require further information on anything covered in this briefing please contact Rachel Holmes (rachel.holmes@farrer.co.uk) or your usual contact at the firm on 020 3375 7000. Further information can be found on the Charities page of our website.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, January 2017


Broadly speaking, this means non-profit organisations.

The Directive containing the exemption has been superseded by another Directive, but the terms of the cultural exemption have remained essentially the same.

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