Query on VAT turnover for artist run gallery

[stapler]

I am a member of a cooperative gallery that sells handmade ceramics. The cooperative is made up of several local potters and we are all equal members. The gallery takes a commission of 30% on each sale, the potter receives 70%. We all do a share of the work voluntarily to keep the gallery open and running.

Our sales for 24/25 were £82,500 but the current rolling turnover is £86,000 as we have had good sales in recent months.

Myself and another potter are meeting with the accountant in three weeks time. The accountant has been mentioning that we are near the VAT threshold.

I would like to attend the meeting a bit more prepared.

Firstly please can I check if it is correct that full amount of the sales counts towards the VAT threshold.

The reason I ask is this,

The gallery does not own or purchase anything, all the ceramics are owned by each potter. We are free to remove or add any pieces at any time.

The gallery takes commission of 30%, so has an income of around £24,750 which pays for the shop rent, rates etc.

I feel like the sales are being counted twice for the purpose of the VAT threshold. For example if I myself sells say £5000 through the gallery, that amount, or the 70% I receive, would also be counted towards my personal sales turnover/threshold. I am nowhere near the VAT limit but this seems wrong to me to have those sales counted twice.

Thank you in advance for any thoughts on this.

[Trevor S]

A lot will very much be dependent on the detail of this arrangement, including the legal entity status of the gallery, the terms of the contracts between the gallery and individual potters, whether these are reflected by the actual practice, and what other supplies might exist. All of which will require the level of information which hopefully your accountant will hold.

But a couple of initial thoughts to consider - including that in your query. This is all on the assumption that the gallery is a separate legal entity

When sales are made at the gallery to customers, are those sales made by the gallery acting as principal, or acting as the agent of the relevant potter? I suspect that the intention is that the gallery acts as agent - this would be supported by this statement "The gallery does not own or purchase anything, all the ceramics are owned by each potter. We are free to remove or add any pieces at any time.". If the gallery was to act as agent, then treatment would likely be:
- 100% of the sales price of each item is income to the relevant potter, counting towards their individual requirement to register for VAT.
- 30% of the sales price of each item is a charge by the gallery to the relevant potter for use of the gallery and its services in facilitating the sale, counting towards the gallery's requirement to register for VAT.

Whereas if the gallery was seen to make the sale as principal:
- 100% of the sale price of each item is income to the gallery, counting towards its requirement to register for VAT.
- 70% of the sale price for each item would be seen as the gallery's expenditure in "buying" the item from the relevant potter. It would also be that potter's sales income, counting towards their individual requirement to register for VAT.

But - do the practical arrangements mirror this? For example:
- Is it really clear to visitors of the gallery that they are buying directly from individual potters? For example, do the receipts issued to purchasers show the name of the relevant potter, or the name of the gallery? If a purchaser buys two items made by different potters at the same time - are they issued with two separate receipts?
- If the purchaser had any issues with the items bought - who would they contact / where would the responsibility lie - the gallery or the relevant potter?
- Who insures the items whilst they are in the gallery? What would happen if any items were broken whilst in the gallery?

There will undoubtably be other practical issues to consider. Purely from a VAT perspective, and whilst the VAT registration threshold remains at its current level (which is actually quite high, compared with many other countries), then the gallery acting as agent should be financially advantageous. However, as some of the examples above, it might be more difficult operationally. If the VAT threshold were to reduce (something which has been speculated on) to an extent that individual potters and the gallery may be required to register even under an agency arrangement, then there may be no benefit in having such an arrangement.

You also mention that the potters "all do a share of the work voluntarily to keep the gallery open and running". I suspect that HMRC might not see that as truly "voluntary" - the potters presumably would not give up there time to work in a gallery without the chance of earning their share of the sales? The potters are providing the gallery with a "supply of staff" - without which the gallery would have to recruit and pay its own staff. HMRC would see this as having a value of some kind. If the gallery was acting as principal, then instead of the 70% being paid to the potters being treated as wholly for the gallery's "puchase" of the items, it would be seen as partially payment for the items, and partially payment for staffing the gallery. Both of these are potentially VATable services - so no real implications. However, under an agency arrangement I can see HMRC arguing that the 30% commission being charged by the gallery is actually two transactions being netted-off eachother - effectively a higher commission charge for the gallery's services, reduced by a value attributed to the potter's services in staffing the gallery. The VAT terminology for this is to call it a "barter". Regardless of the fact that no money changes hands in relation to the staffing, HMRC could require both the gallery and the potters to use a higher notional income figure when determining the need to register for VAT. The actual valuation of the barter would be for the parties to agree - HMRC generally accept any valuations which can be demonstrated to be "fair and reasonable".

These are just a few quick high-level thoughts. As mentioned at the start - assuming that your accountant was involved in the set-up of these arrangement, they will know what structure was used and why, and the VAT implications of it.

[stapler]

Thank you for your reply and the time and care given to explain it.

I would agree the intention is to act as agent but the practical arrangements do not mirror it. Thank you for the detail you include about the potters not being truly voluntary. It is interesting and helpful to see it from another side and how HMRC would see it.

Could I also ask,

Would the gallery charge VAT on the full sale price or is it on the 30% commission, I hear different versions. Also, would it affect anything if some of our members are VAT registered.

Thank you

[Trevor S]

It depends on which of the structures is deemed to be in use. If it had to register for VAT, the gallery would have to declare VAT on "its income" - which is 30% of the sale price if it is agent of the potters, but 100% of the sale price if it making the sale as a principal. Likewise, VAT registered potters would need to declare VAT on "their income" - which is 100% of the sale price if the gallery acts as agent, or 70% of the sale price if the gallery is principal.

As for my note on "barters" (such as the potters working for the gallery without charge) - if a VAT registered party is seen as making a supply under such an arrangement, they will be required to declare VAT on the "value" of that supply as if it was "income", even if no actual charges are made.

Remember that if a party is VAT registered, it is usually entitled to recover the VAT it directly incurs on its business costs (subject to holding valid invoices and other criteria). The VAT returns sent to HMRC show the amount of VAT due on supplies made by the business, and the amount of VAT charged to the business by its suppliers - with the business being required to pay HMRC the difference between these figures. So, for example, if both the gallery and the potters were required to register for VAT, then although one would have to add VAT on their supplies made to the other, the one receiving the supply could reclaim that VAT. It is the ability of VAT registered businesses to recover the VAT incurred on their costs which prevents the potential for double-taxation that you considered in your original question.