We knew there would be extra paperwork. But, while Brexit negotiations dragged on, there was a limit to what anyone could do to fully prepare. With an eventual deal struck on Christmas Eve, just days before the deadline, it now falls to governments and businesses to ensure they have understood and implemented its contents. At more than 1,200 pages in length, the Trade and Cooperation Agreement is not a speedy read. So what are the key legal developments that art businesses should know about – and how will these affect their dealings?
Customs declarations and documentation for UK/EU trade are now required. The agreement does not contain any of the previously announced phasing for implementing the customs requirements, and the EU has not confirmed any transition period during which they would be waived. During January, shippers have reported delays at the border, and some have found that their status as regulated agents for air freight has not been recognised by airlines (leading to increased screening checks and sometimes the opening of cargo by officials without art-handling experience). However, given that many shipments have been postponed due to the pandemic, the situation on the ground does not appear to be as bad as many had feared.
As anticipated, when UK art dealers are selling artworks to customers in the EU, these sales will become exports that must be dealt with in the same way as sales of goods to customers outside the EU. The sale will become a zero-rated export (i.e. a good on which the VAT rate is set to zero) where the usual criteria for zero rating apply. As was already the case with non-EU sales, an important aspect of that criteria is the export of the artwork within three months of sale. Where the UK dealer would require the co-operation of the buyer to provide evidence of export (of which the dealer will need to keep a record in case of HMRC inquiries), they would be wise to include suitable contractual protections in their terms of sale.
If the EU customer is to act as importer, they will be responsible for the import VAT due in the EU country of import (at the lower rate applicable to artworks). Some critics have decried Brexit as encouraging sellers away from London, arguing that those looking to sell to European collectors may now prefer to consign directly to an EU auction house – probably Paris – in preference to a London auction house. However, depending on how the sale is structured, it is not necessarily the case that a sale through London would add cost to the European buyer. UK dealers delivering directly to EU clients should take advice on whether they are required to register for VAT in the EU.
When UK art dealers are importing artworks from the EU, these will now be dealt with as if they were imports from the rest of the world. So, while the EU-based dealer will not be charging VAT on the sale to the UK dealer, import VAT – at the reduced 5 per cent rate applicable to art – will become due from the UK dealer on entry into the UK. It remains to be seen whether the government will contemplate lowering this rate.
Because stock purchases from the EU are now classed as imports into the UK, they will therefore be excluded from the VAT margin scheme for onward sale (where VAT is only due on the difference between what you paid for an item and what you sold it for) – unless notification is made to HMRC, says Catherine Thompson, a partner at accountants and tax advisers Rawlinson & Hunter. UK dealers should take tax advice before going down this route, Thompson advises, because it would require a formal notification to HMRC, the importing UK dealer would have to opt not to recover the import VAT, and it would require all imported works to be treated in the same way. It is, however, also worth noting that certain customs reliefs (relating to import VAT and duties where applicable) that were previously reserved for transactions with countries outside the EU have now been opened up for EU trade.
The Temporary Admissions scheme already allowed businesses to apply for the suspension of import tax on temporary imports, and the scheme is expected to continue for use by art businesses in relation to artworks entering temporarily from the EU (for example, for exhibitions or art fairs). Those operating Temporary Admission under a guarantee (typically smaller or newer arts businesses without a substantial trading history) will have to consider whether their guarantee is adequate if artworks are now also to be imported from the EU, adding to the value of works brought in under the scheme.
The Trade and Cooperation Agreement confirms that EU laws in relation to Artists’ Resale Rights and Anti-Money Laundering will remain enshrined in UK law. Indeed, the agreement aims to strengthen EU and UK anti-money laundering actions through increased information-sharing and co-operation. The agreement specifies that regulatory matters shall not constitute a ‘disguised barrier to trade’. As such it is possible that the trade in jewellery, classic cars and antique furniture (items which are excluded from the definition of works of art in the current regulatory framework) may fall fully within the regulated sector for AML in the UK before too long. The Ivory Act 2018 will also remain as law, and the EU and UK have both committed to regulations relating to endangered flora and fauna by restricting their trade in line with the Convention on International Trade in Endangered Species of Wild Flora and Fauna of 1973 (to which they are both already party).
Of critical importance to the Trade and Cooperation Agreement are the so-called ‘level playing field provisions’, which seek to manage divergence between the EU and the UK legal and regulatory regimes. Time will tell whether the UK has the appetite for, or ability to achieve, any legal or regulatory changes that could help the art sector. The nature of the EU/UK relationship, the matters as yet left undecided, and the framework of the Trade and Co-operation Agreement itself (which allows either party to terminate the agreement on 12 months’ notice) mean that the EU and the UK will remain in negotiations in one way or another for many years to come.
Sarah Barker is a Partner and Head of the Art Group at law firm Lee & Thompson LLP
This article does not constitute legal advice and should not be relied upon. If you require legal advice in relation to any of the issues raised in this article, then specific legal advice should be sought on a case by case basis.