Revenue & Customs Brief 27/07

VAT: Cultural exemption – clarification of ‘direct or indirect financial interest’ [Note 2 (c) to Group 13 of Schedule 9 to the VAT Act 1994]

This Brief provides guidelines, in the light of recent Court of Appeal Judgments in the cases of Bournemouth Symphony Orchestra (C3/2005/1681) and Longborough Festival Opera (C3/2006/0369), on how to interpret the term ‘direct or indirect financial interest’. This is for the purpose of the exemption for cultural services contained in Group 13 of Schedule 9 to the VAT Act 1994. The term is relevant because one of the conditions for exemption for services provided by an ‘eligible body’ under Item 2 of that Group is that the body ‘is managed and administered on a voluntary basis by persons who have no direct or indirect financial interest in its activities’ (Note 2(c) refers).

This brief supersedes the advice given on this topic in paragraphs 4.9 to 4.11 of VAT Notice 701/47 Culture and paragraphs 2.2 and 2.3 of section 2 of chapter 28 of V1-7 (HMRC guidance). Update 1 to VAT Notice 701/47 will be available on our website shortly.

The key change from existing guidance is that any direct or indirect financial interest only affects entitlement to exemption if it is actual, not potential. It is now our view that a person who is managing and administering the cultural body can be seen to have a direct or indirect financial interest in its activities only when:

• the person receives any payments for services supplied to the cultural body above the market rate, paid as routine overheads, or receives any payments which are profit-related (whether below, at or above market rates); and
• there is a link between the payments and the person’s participation in the direction of the cultural body’s activities.

This means that payments to individuals for services of managing and administering the body are not financial interests if:

• they are allowed by the constitution;
• the recipient is excluded from any decision-making regarding the award of any contract to themselves;
• the payments are not above market rates; and
• are not linked to profits.

There is no financial interest where the only potential is for a financial loss – for example, where a risk is underwritten or guaranteed – so that the guarantor only stands to lose money and not gain money as a result.

It is not possible to give exhaustive guidance to cover every eventuality, and the advice given here is intended as a general guideline only.

Further information

For further information and advice, please contact HM Revenue & Customs’ National Advice Service.

Issued 22 March 2007