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HMRC internal manual

VAT Cultural Services

Cultural bodies with local authority councillors as trustees: Public bodies - joint ventures and profit / income sharing arrangements with local authorities

The supply of cultural services by a public body is defined in Items 1(a) and 1(b) of Group 13 of Schedule 9 to the VAT Act 1994. Additional information regarding Item 1(b) is given in Note 4 as follows:

Item 1(b) includes the supply of a right of admission to a performance only if the performance is provided exclusively by one or more public bodies, one or more eligible bodies or any combination of public bodies and eligible bodies.

This would appear to imply that either a public body, an eligible body or a combination of these entities can only apply the exemption to their supplies of cultural services.

The exemption may also apply to other arrangements - for example, where a commercial non-eligible body (production company) provides a production to a local authority, who in turn makes a supply of cultural services to the general public. In this case, Note 4 will not apply because the local authority is legally responsible for providing the entire production to the public, and merely subcontracts certain services to a commercial supplier. This is supported by our solicitor’s advice - which states that in certain cases it is possible to accept that the local authority is not involved in a joint venture with its commercial supplier.

Each case should be considered on its own merits. However, a typical example of such an arrangement is described below, which you may find helpful when considering the VAT liability of similar arrangements between a local authority and a commercial non-eligible body.

When arrangements are entered into by a local authority with a third party commercial non-eligible body (production company) and the shows are put on at the premises which are owned and operated by the local authority, the local authority will normally enter into an agreement with the third party production company regarding the staging of a specific event, such as a musical for a specified period.

Under this arrangement, the local authority will provide the venue and staff, will obtain the necessary licences, advertise the show and operate the box office. The third party company provides the show, scenery and cast. The third party company will receive remuneration which is based on an agreed percentage of the total box office takings subject to a guaranteed minimum payment and a bonus if sales are particularly high.

This form of remuneration (as opposed to a flat rate fee) is presumably designed to provide some security for both sides - the local authority will only have to pay the guaranteed minimum if sales are low and the third party company will have negotiated a guaranteed minimum payment which at least covers its costs. This arrangement provides the third party company with an incentive to put on a good show.

While these arrangements serve to limit the risks which the local authority takes in agreeing to put on a particular production, they do not remove them entirely as, in the event of very low ticket sales, it will still have to pay the guaranteed minimum. In a sense, some of the risk is transferred to the third party company as the profit element will depend upon ticket sales. As a result of the arrangements, the risk to each party in the agreement is capped at the outset. This is due to the fact that both parties know what they will have lost (the local authority) and gained (the third party company) if tickets are not sold.

This type of arrangement / agreement is difficult to pigeonhole in terms of whether it is a joint venture or not. In a typical joint venture between two parties, both parties will assume the same amount of risk (although this may be proportional if the agreement is 70/30 rather then 50/50).

Typically, the parties should input resources which are later correspondingly reflected in the level of benefit which they receive when the profits of the venture are shared. If there are losses, they will be shared in the same way. The parties will be equal and neither will control the other.

In this scenario, the risks assumed by each party are not equal, but are defined and capped at the outset. The main risk remains with the local authority. Although there is an element of profit sharing (the agreed percentage), there are other factors which need to be taken into account such as the guaranteed minimum payment and the bonus. The parties are therefore not equal but have entered into an agreement which sets out their respective rights and obligations.

Given the facts, HMRC do not think that it would be correct to categorize this as a joint venture as such. However, it is an arrangement whereby both parties do retain a financial interest in the success of the project, and the local authority are making the supply of cultural services for VAT purposes.