Withers Worldwide

The European Court of Justice has ruled that the implementation by the UK of the Sixth VAT Directive was incorrect in allowing auction houses to charge VAT at a rate of 5% instead of the standard rate of 17.5% on their commission when selling defined categories of works of art held in the UK under temporary importation arrangements.

Import VAT is due at the discounted rate of 5% on the value of fine art, collectors' items and antiques (as defined in the VAT Regulations) imported into the UK from outside the EU, subject to certain exemptions. The temporary importation regime allows sellers to import fine art, collectors' items and antiques on a temporary basis for the purpose of their sale in the UK. In that case, no import VAT is due when the property is imported. When it is sold, the buyer may export it outside the EU in which case no VAT is due subject to certain conditions. If the buyer decides to keep the property in the EU, he will effectively import the property into the UK and pay import VAT at the discounted rate on the hammer price.

Until the decision of the European Court of Justice, when a British auction house sold works of art held under temporary importation arrangements, it would charge the buyer VAT on its commission at a rate of 5%. Thus, the buyer would be charged VAT at 5% on the aggregate of the hammer price and the buyer's premium. The dispute arose because the European Commission claimed that a correct application of the Sixth VAT Directive required that VAT be charged on the auctioneer's commission at 17.5%, not 5%.

The Commission argued that under the Sixth Directive, all operations carried out whilst the property is under temporary importation must, if the property is subsequently imported, be taxed as if the operations had been effected after the definitive importation of the property. The reduced rate must therefore be applied to the value of the property before its sale by auction, that is to say, to the price paid by the purchaser on that sale, less the auctioneer's commission. Then the standard rate of VAT is applied to the commission.

The British government challenged that interpretation. In its view, the auctioneer's commission should be included in the taxable amount for importation and not taxed as a transaction within the UK, as would be the case for a transaction taking place after definitive importation.

The European Court of Justice decided that the correct interpretation of the Sixth Directive was that all transactions effected under temporary importation arrangements must be taxed as if they had been effected within the territory of the country after the definitive importation of the property.

Accordingly, where a work of art is sold by auction under arrangements for temporary importation and following that transaction imported into the territory of the European Union, it is necessary to draw a distinction between the sale by auction and the importation and to tax the two transactions separately at different rates.

What does this mean in practice?

When buying at auction in the UK a work of art marked in the auction catalogue as being held under temporary importation arrangements, the buyer who decides to keep the work of art in the UK will continue to pay VAT on the hammer price at a rate of 5% but will be charged VAT at a rate of 17.5% on the buyer's premium.