There is great uncertainty around the precise form Brexit will take and the effects it will have on the UK art market.
The Prime Minister has made it clear that the UK does not intend to join the EEA following Brexit, meaning the UK will not have access to the Single Market, nor will it remain part of the Customs Union.
Against that background, this note considers some of the likely challenges and uncertainties Brexit will bring for the movement of works of art between the UK and EU in connection with treatment of VAT, customs duties, the export of cultural property and barriers to trade relating to copyright restrictions.
This note also identifies potential competitive advantages for the UK art market due to different VAT treatment on sales of works if the UK is no longer in the EU and opportunities to reform the law relating to Artist’s Resale Right.
Works of art imported into the UK from a non-EU country are currently subject to an effective VAT rate of 5 per cent (as compared to the standard rate, which is currently 20 per cent) and the benefit of this reduced rate can be passed on to a UK end buyer where the dealer has sourced the work from outside the EU.
However, where a UK dealer acquires a work of art from within the EU and sells it on, a UK end buyer currently incurs VAT at the standard rate of 20 per cent.
If the final form of Brexit is such that the above distinction between EU countries and non-EU countries ceases to exist from a UK perspective, it will be open to the UK simply to impose a uniform VAT rate of 5 per cent for works of art imported from the remaining EU countries and from elsewhere. UK buyers could potentially benefit from the effective reduced rate of VAT on works of art sourced from EU member states, whether sourced by a UK dealer from within the EU or sourced directly by the end buyer from within the EU.
A similar benefit may arise for buyers in other EU member states. A number of other EU member states apply reduced effective rates of VAT to works of art which are imported into the EU and, following Brexit, buyers in these countries might benefit from these effective reduced rates in respect of works sourced from the UK, thereby giving UK dealers a competitive advantage when selling into remaining EU member countries.
The temporary movement of works of art between the UK and EU member states (e.g. for exhibition, on-selling or restoration purposes) could, however, become more expensive and burdensome following Brexit. It is likely that regimes which currently apply in the UK and in the other EU member states will continue to apply following Brexit so as to remove the need to account for import VAT where works of art are moved on a temporary basis between the UK and an EU member state. However, in many cases it is likely that a guarantee will be required by the tax authorities of the country to which the works are to be temporarily moved. Providing such a guarantee may prove costly (particularly in the case of high value works) and, in some cases, impossible.
The potential requirement to apply for VAT reliefs, provide guarantees and undergo more extensive procedures at the border are likely to make moving art between the UK and EU member states more administratively burdensome.
The principle of free circulation means that works of art moving between the UK and another EU member state do not currently attract customs duties. Such works therefore bypass the customs procedures which apply to goods moving between EU and non-EU countries.
If works of art moving between the UK and EU member states cease to benefit from free circulation following Brexit, then it is likely that additional costs will arise in relation to such movements.
Whilst works of art will often qualify for the zero per cent rate of customs duties (and it assumed that this will continue post Brexit) extended border waiting times would likely lead to increased transport and insurance costs. Of particular concern is the UK border authorities’ ability to cope with the significant increase in the volume of transactions which will require processing.
Export of cultural property
Broadly speaking, objects in the UK that were produced over 50 years ago require an export licence before they can leave the country. A UK licence is required where the property is being exported to the EU, and an EU licence for further afield. There is a second level to this where the item is either covered by general licensing rules or requires its own licence, depending on value and significance.
Brexit should provide a welcome opportunity to ensure that these rules are fit for purpose and interrelate in a cohesive manner. Mooted improvements include “passporting”, where each item has a fixed term export licence, and an electronic UK licensing system to replace EU licensing. Although checking at entry ports should in theory increase, this could also mean that more museums, auction houses and art dealers become Authorised Economic Operators, so that licenses are verified at final destination rather than point of entry.
Copyright and exhaustion
Copyright owners have the first right to distribute copyright work (and copies thereof) to the public. However, pursuant to the principle of free circulation of goods, once a first distribution of work has been made in the EU, the author has no right to restrict the further distribution of such work within the EU, the right having been exhausted, enabling a secondary market for such work.
Following Brexit (and provided the UK does not join the EEA), the position on exhaustion of rights needs to be reassessed. The EU has proposed that intellectual property rights exhausted in the EU before Brexit should remain exhausted, both in the EU and the UK. However, the proposal in respect of exhaustion of rights arising following Brexit is unclear.
The UK could amend the position under UK law, such that following a first distribution of works in the UK the copyright owners’ rights to restrict further distribution of works are only exhausted in the UK, or are exhausted internationally. However, conversely EU rights holders could restrict the further distribution of works which have been distributed in the EU into the UK due to rights not being exhausted in respect of the UK, which could negatively affect UK trade. It will therefore be important that agreement is reached to ensure cross-border portability of works following Brexit.
Artist’s Resale Right
The Artist’s Resale Right (ARR) is derived from an EU directive and was implemented into UK law in 2006, which implementation was and continues to be controversial. Many art market professionals welcome the opportunity Brexit gives the government to revisit ARR through reform or abolition to improve the UK’s competitiveness as an art market.
ARR entitles visual artists or their heirs to receive a royalty payment each time their work is sold on the secondary market in the UK through an auction house, gallery or dealer. The royalty is calculated as a percentage of the sale price, on a sliding scale ranging from 0.25 per cent to 4 per cent, subject to exemptions and a cap of €12,500. ARR is payable on sales of works in which copyright subsists, which it does for the lifetime of the artist plus 70 years. The main sectors of the UK art market affected by ARR are therefore Modern and Post War & Contemporary.
ARR is not levied in London’s main competing art centres in New York, Hong Kong and Switzerland, giving rise to concerns that the application of ARR in the UK leads to a competitive disadvantage and the displacement of sales to these competing centres. While there are calls for ARR to be introduced universally to support artists and protect deceased artists’ legacies, there is no indication that ARR will be implemented in those markets.
Some critics also propose that ARR should be restricted to living artists only, or that the term of application for deceased artists should be reduced, on the basis that the driver for ARR is to support living artists, not wealthy estates of deceased artists. ARR is also criticised for deterring dealers from purchasing qualifying works and leading to a series of related transactions being taxed repeatedly. Reforms such as allowable deductions or grace periods for resale to benefit those buying to resell could address such concerns.
While Brexit provides an opportunity to reform ARR law by deviating from the EU directive, any change is likely to be subject to fierce debate by parties with competing interests and is unlikely to happen quickly or be a priority for the government.
It is likely that Brexit will make the movement of art between the UK and EU more burdensome and costly, but there are also certain opportunities for the UK art market to benefit from Brexit. However, such changes are unlikely to take effect for some time, particularly as the government has announced its proposal for a transitional / implementation period of “around two years” (which may ultimately be considerably longer than that). If that position can be agreed with the EU, the UK would, during such transitional period, continue to be bound by the existing structure of EU rules and regulations, which would include continued membership of the Customs Union and the Single Market.
This transitional / implementation period would be welcome in providing more much needed time to agree and implement a new trade agreement between the UK and the EU as well as to consider necessary amendments to domestic UK law and the UK’s future relations with other countries. We have in this note considered just a few potential impacts Brexit will have on the art market, but there are many others, including restitution claims for cultural property illegally removed between EU member states and the anti-money laundering regime, which will need to be considered once the position is clearer.