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Lord McIntosh of Haringey: My Lords, the noble Viscount should recall another song from "Iolanthe": "united we sing as one individual".

Viscount Falkland: My Lords, there you are! There is a very good example and a foretaste of the very good-humoured answer we are likely to get from the noble Lord, Lord McIntosh. I think he is probably going to answer us as a Minister for the arts, representing the DCMS. We shall have the advantage, with all his experience, of receiving his advice on how the matters before us can be resolved, if indeed they can be.

Many of your Lordships have described the situation before us in terms of Alice's Adventures in Wonderland or even as Gilbertian. The noble Lord, Lord Strabolgi, referred to that, but actually the situation is becoming almost Kafkaesque. We have a government who tell us that free admission and access for all is a prime aim, and we on these Benches agree with that. Yet here we have a situation which has moved on from the one we discussed some weeks ago--or was it days ago?--when the moneys available for free access were described as insufficient. Those museums and galleries which charge have the benefit of recouping their VAT, because they are adjudged to be a business. Those that do not charge--and many of them have grants from various sources as well as from lottery funds--and have great plans will find that their VAT bills are enormous. They will be crippling.

That is the extraordinary position in which we find ourselves. I find even more extraordinary the Kafkaesque prospect that if this situation continues there will be arguments with Customs and Excise, and the uncertainty that brings, about partial free admissions, as has been mentioned by other speakers. Following the Imperial War Museum case, where it was accepted that it was possible that some visitors who came in free of charge did not materially affect the position, we have been given fair notice that Customs and Excise will now look very carefully at what museums and galleries do by way of mitigating their position. That may prove very difficult. The noble Lord, Lord Renfrew, asked from his experience whether it was desirable for museums and galleries to be spending all this time worrying about VAT, rather than getting on with what they should be doing: namely, providing excellent quality services for all, particularly for young and underprivileged people, throughout the country.

It seems an extraordinary situation because anyone who cares for the arts--a Rip van Winkle if you like, and here I have introduced yet another level of a Winkle-esque situation--who arrives here and discovers this state of affairs will wonder what kind of

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a country they have arrived in. If they arrived in France or Germany they would find a very different situation, because in those countries they spend almost double what we spend in terms of taxation moneys on the arts.

This whole situation is set against a background which is familiar, even in local government areas where museums and galleries come within the mechanism of Section 33 of the Value Added Tax Act. Within the English local government finance system the arts are not classified separately and are not taken into account separately in applications for revenue support grant. Is it surprising, therefore, that arts provision across the board, let alone from museums and galleries, is extremely patchy?

It is against that background that you get departmental squabbling, as the noble Lord, Lord Morris, described it. I do not think there is any squabbling: I wish there were, and I hope that the noble Lord will tell us that there is squabbling.

The other evening, together with parliamentary friends, I went to a presentation in another place which was organised by the All Party Group for the Arts in London, at which the mayoral candidates were quizzed on their plans for the arts. I myself asked a question on this very point, and the only satisfactory answer I had--satisfactory to me because it was robust--was from Mr Dobson. Mr Dobson made a colourful comparison: he said that in the Wild West--and this is why I shall put a cross somewhere on the paper for Mr Dobson in the forthcoming election--people settled matters with bullets, but we are parliamentarians. He went on to say that it was outrageous, and that the Government would settle this by using legislation. I like that approach. Perhaps the Minister will be able to tell us whether that will be possible. I hope that it will be possible, because this situation cannot continue.

In preparation for this debate, I have tried to explain the issue to several friends, including some who know the arts. Their reaction has been to open their mouths in amazement and say, "That is ludicrous!".

Perhaps I may make one more specific point. What consideration has been given to the wishes of those who, over the years, have made bequests to museums and galleries, or those who will do so in the future? Almost without exception, such bequests are tied to the prospect of free admission for all. This situation runs absolutely counter to the wishes of those who make bequests. The Mahon bequest illustrates the problem.

If there is another way of dealing with this matter, I hope that the Minister will tell us. After attending a briefing, I understand that the European Union is not bothered about it and is willing to leave the matter entirely in the hands of the UK Government. For that reason, I hope that the Minister--without singing another aria in this Gilbertian situation--will be able to cheer us. Unless a sensible approach is adopted, the day-to-day situation looks dire for those who have to deal with it on that basis.

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7.1 p.m.

Baroness Anelay of St Johns: My Lords, I, too, thank the noble Lord, Lord Freyberg, for giving us the opportunity to discuss the vexed issue of VAT rules and how they inhibit the ability of trustees to abolish entrance fees for museums and galleries. I was interested to hear about the situation from the points of view of my experienced noble friends Lady Hooper and Lord Renfrew, as trustees respectively of the Merseyside Museum and the British Museum. They told the House about the many problems involved in administering the system.

From what we have heard in today's contributions, it is certainly apparent that the Government have not so far thought through the full impact of their policy on free access. I doubt if I shall be as generous as the noble Viscount, Lord Falkland, and absolve the Minister from answering on behalf of the Treasury. I remind noble Lords that in this House, unlike in another place, Ministers answer for the Government. However, I am sure that the particular Minister on the Front Bench tonight will be able to do that perfectly well.

This problem was raised some 15 months ago by my noble friend Lord Montagu of Beaulieu. In December 1998, in a Starred Question, he asked the Government whether the VAT implications in this matter had been worked out. The answer from the Minister was something along the lines of, "We are still talking about it", or more accurately, "We are in negotiations on this point". Yet we are no further forward. I also note that when the Government talked then on the subject of free access, they did mean free entry.

However, I noticed that in the speech of my noble friend Lord Dundee he sought a commitment from the Government that their policy remained that of free entry for all. I shall listen closely to the response of the Minister on that point. That is because over the past year or so that I have held this brief I have noticed that the Government talk about free entry, free access, wider access and keeping free those museums currently charging nothing. The policy seems to ebb and flow. I have heard the Government say that they have not really ever pledged--either before the election or in the manifesto--to provide free entry for all to museums. For that reason, I shall be interested to hear what happens tonight.

Whatever the semantics of the matter--and others have referred to semantics tonight--the fact is that throughout these discussions the Government have made the public believe--this is important--that they would introduce free entry to all national museums and galleries. I shall refer again, as I did two weeks ago when this subject was debated, to a Department for Culture, Media and Sport press release from 24th July 1998 in which the Government referred to, "universal free entry in 2001". However, only in February of this year, during Question Time in this House, another variation was made on the theme in response to a

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Question tabled by the noble Viscount, Lord Falkland. The Minister described what he called the "wider sense of access" which,

    "includes the ways in which museums and galleries can improve the presentation of their collections and improve the hours in which they are made available; it includes the publicity for them; and it includes the way in which they are extended to the wider world outside museums and galleries".

He then went on to say,

    "It is that wider sense of access about which the Government are most concerned".--[Official Report, 21/2/00; cols. 7-8.]

If the Government are "most concerned" about the wider issues of access such as publicity and so forth, surely the corollary of that is that they are less concerned about free entry. We then have cause to question how great is their commitment now to the more obvious form of access so far as concerns the public: that is, simply free entry.

As we have already heard, the VAT anomaly bedevils trustees' attempts to give free entry for all. Both tonight and two weeks ago the noble Lord, Lord Freyberg, has explained very clearly that the National Art Collections Fund recommends what appears to be a straightforward and comprehensive solution to that problem: Section 33 of the Value Added Tax Act 1994 should be amended. I look forward to hearing whether the Government accept this as a solution and, if not, why not. Earlier in the debate my noble friend Lord Crickhowell posed certain forensically detailed and powerful questions about the operation of Section 33, in particular as regards the difference between a levy and a tax. I look forward to hearing the Minister's replies to those questions.

Over the weekend reports in the press stated that the Government intend to reject the recommendation of the National Art Collections Fund and to adopt a compromise procedure; namely, the introduction of free periods of entry to museums for everyone, or perhaps free entry commencing next year only for those adults of working age claiming state benefits. What advice have the Government received about whether this kind of development would provoke a challenge from Customs? Several noble Lords have highlighted all the difficulties that could arise.

Last week the NACF kindly provided a briefing session for interested Peers. As it pointed out, if the balance between paying and non-paying visitors tips too far towards the non-payers, it throws into question the level of "business activity". In short, the more that charging museums move in stages to a complete free admissions policy, the more likely they are to encounter a non-business challenge from Customs. The NACF says that this will result in greater financial uncertainty and lead to disputes and possibly litigation, all of which would have a significant impact on museum and gallery management costs and resources.

Today the three Ministers from the Department for Culture, Media and Sport--and I say that advisedly because I think that it is a disappointment that someone of the Minister's ability is only a spokesman for DCMS--are all over the place, both

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geographically and figuratively. They are visiting St Ives, York and Liverpool to mark the start of free entry for pensioners which comes in at the end of this week. But, as several noble Lords have mentioned today, is the Minister aware that Customs and Excise has already advised that the introduction of free entry to pensioners is in itself likely to tip the scales against museums and make them fall into the category of non-businesses? My noble friend Lord Crathorne drew careful attention to this problem. Such a move would force museums to lose their rights to VAT reclaims. If that happens, will the Government compensate them for that loss, because they would have caused it?

I was intrigued by the reference made by the noble Viscount, Lord Falkland, to last Monday's meeting of the All-Party London Arts and Culture Group. I, too, listened with interest to what was said at that meeting. I do not often quote Labour candidates, but I should like to do so as well. I took a careful note. The official Labour candidate said that he is "fanatically in favour" of free entry to London museums. He said:

    "The idea that some preposterous quirk in the VAT law should stop it is barmy".

He does not mince his words. But, unlike the noble Viscount, I shall not be putting my cross against his name. I cannot quite go that far. Having heard the debate, I wonder whether on this occasion the Minister will be able to announce a change in the law and make Mr Dobson's day.

7.10 p.m.

Lord McIntosh of Haringey: My Lords, today's debate has been a splendid cry of support for more funding for museums and galleries, and for wider and free access. We should all be grateful to the noble Lord, Lord Freyberg, for that.

I am grateful to the noble Baroness, Lady Anelay, for finally reminding the House that I speak for the Government and not specifically for the Treasury or for the Department of Culture, Media and Sport. If I were to stand at the Dispatch Box and speak on a sectoral basis for a particular department and run the risk of someone else standing up and saying something different on behalf of another department--whether it should happen to me or to anyone else is not important, despite the relatively friendly teasing I have endured this evening--I would say that this Government are all over the place. That is not the case.

The published subject of the debate is VAT and national museums and galleries. However, I think it is fair to say that the thrust of the debate has, quite properly, been about levels of public funding for museums and galleries. If that is the case--I believe it to be not only true but desirable--then we should talk about net levels of funding: the funding that goes to museums and galleries.

Noble Lords should not assume that we in government are fools and that we do not think about the implications of taking money back in VAT from any public service, be it museums and galleries or anything else. If it were not the case that, at all times since the general election, those in the Treasury,

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Customs and Excise and the Department of Culture, Media and Sport had been fully aware of the VAT implications of free access, we would be properly worthy of criticism. But of course we have always been aware of the implications; we have always been conscious that the net funding, the net burden on the public purse, is the proper consideration.

However, having said that, let me set out our views--they have not changed--about wider and free access, about the nature of VAT itself and the problems we face in trying to define who should or should not pay VAT. I should like to look at some potential solutions and then specifically at Section 33 of the VAT Act 1994, its history, the principles of preception on which Section 33 is based, the European dimension and the issue of precedent, which other people call by the more emotive name of "floodgate". I should then like to reach some kind of conclusion.

First, let me say about free access what I think your Lordships know. Funds have been available to permit free access for children since April 1999--and will be available for free access for the over 60s from 1st April (this coming Saturday)--to the currently charging national museums funded by DCMS. We are continuing to assess the most effective ways of enhancing access in 2001, and we shall make an announcement on that in due course. On that, I do not intend to make any advance or retreat from previous policy. I am simply repeating what has been the position for a very long time.

Free access for children has been very successful for those museums which previously charged. To the end of January, visits by children were up by 18 per cent. As the noble Baroness, Lady Anelay, said, free access for the over 60s is being launched today by the Secretary of State at the National Railway Museum in York and by other Ministers in St Ives and in Liverpool. We have also provided the funds to allow the currently DCMS nationals to stay free.

I welcome what the noble Viscount, Lord Falkland, said about Sir Denis Mahon and his recent bequest of his wonderful collection of Italian baroque paintings. Some time ago, I was sent to Bologna to--it is impolite to say-- "schmooze" Sir Denis Mahon; to assure him that he was safe in leaving his paintings to our national museums and galleries. He was and is determined that they should go only to museums and galleries which have free access, and I and other Ministers have been able to assure him that that will continue to be the case. He has accepted, correctly, those assurances, and he has made the bequest to which the noble Viscount referred.

In addition to that, the Secretary of State has announced that Tate Modern at Bankside will have free access for all when it opens. It is probably the most wonderful, largest, new art gallery in this country for the whole of the last century. An additional grant of £5 million is being paid to the Tate Gallery this coming year, and £6 million next year for that purpose. So our commitment has not changed; it is as firm as it ever was.

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VAT of course is a potential obstacle to extending free access. We understand the concerns that it may limit our future freedom of action and may even threaten the free access already available. We have always been aware of the VAT implications of the free access policy--especially at a time when many national museums and galleries are carrying out major capital developments mainly funded by the National Lottery--and we have continually been in contact with Customs and Excise to try to address any VAT problems.

But this is not an anomaly of VAT--this is VAT. This is what VAT is about. The burden of VAT is intended to fall totally on the final consumer, either private individuals or organisations which are not in business. The admission of people to premises for a payment is a business activity, but free admission is not. Museums which charge for admission are generally in business--some have non-business activities such as free academic research--and they can recover all or nearly all of the VAT they incur. Museums which do not charge for admission, or which have substantial numbers of free admissions, usually have some business activities--such as shops, cafes or special exhibitions--which entitle them to recover some VAT. However, they cannot recover VAT relating to their non-business activities. The additional grants to museums which abandon charges are unlikely fully to off-set the VAT cost. The NACF perceives this as an inducement to museums to charge, while those which offer free admission suffer a heavy financial penalty.

Of course I recognise the concern that the situation is worse because all museums are currently incurring a lot of VAT because of National Lottery capital projects. But it has always been the case that VAT can be included in the grant request to the National Lottery. If the VAT has not been included in the grant request for a project which is liable to VAT without it being recoverable, then the grant request has not been properly made. It is of course true that free admission can mean that some VAT cannot be recovered. This is a complex issue. It depends very much on the museum's individual circumstances and it is subject to negotiation between the museum and the local VAT inspector.

Before leaving the question of lottery grants, I should say to the noble Lord, Lord Renfrew, that the figures that he saw in my Answer to the noble Lord, Lord Freyberg, are the figures provided for the British Museum. They have not been inspected or verified by Customs and Excise. That is the basis on which they have been given. One noble Lord said that this is a lottery. It is not. The local VAT inspector deals with his local museums and galleries, not because he is a kind of free-standing baron able to negotiate as he thinks fit, but because the needs and circumstances of museums and galleries are different one from the other. Customs and Excise is concerned with equity rather than equality, and it will be directing the approach taken by local officers to ensure that the same basic principles are followed.

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Let us look at what potential solutions there might be. We could treat non-charging museums as being in business so that they can recover all or most of the VAT they incur. However, in both UK and European Community law business involves making supplies for a consideration; and any change to that would mean amending the sixth directive. To amend the sixth directive I have to say, frankly, is all but impossible at least in the foreseeable future. Only the Commission can propose legislation, so anyone suggesting a change to accommodate museums would need to convince it, first, that there was a problem and, secondly, that there is a solution which is consistent with the basic scheme of the tax. This is not a cascade tax; it is a tax on the ultimate consumer; and, frankly, we are unlikely to overcome the first hurdle.

Another solution is that of the National Museums and Galleries on Merseyside to which the noble Baroness, Lady Hooper, referred: admission at a reduced cost. Customs and Excise has confirmed that, provided museums make more than a token charge for admission, reduction of the charge should not significantly affect their VAT recovery.

Finally, there is the proposal, the subject of the debate, to include national museums and galleries within Section 33. That is considered to be a quick and easy method for national museums and galleries to recover tax which they cannot otherwise claim. Of course, we are grateful to the National Art Collections Fund for the paper it produced with the help of the Charities Tax Reform Group, and for the approaches it has made to the European Commission.

Let us look at the history of Section 33. It is part of the original 1972 VAT legislation. It allows certain bodies to reclaim tax incurred on their purchases used in carrying out their non-business activity. But apart from exceptions like the BBC which was introduced at the very beginning, this status has been restricted to local authority-type bodies with legal powers directly to precept on local taxation--not local authority museums, I have to say to the noble Lord, Lord Crickhowell, but local authorities--for all their services. If I said to him that they levied charges and not taxes, I was almost certainly wrong because that is not the implication. This is important because the total amount of VAT refunded in 1999 under Section 33 to local authorities was about £3.4 billion.

What about precepting as a determining factor for inclusion? The criteria for adding new bodies is that they carry out new local authority-type functions and have the power in law directly to precept on local authority funds. Since 1972 it is true that 33 bodies have been added by Treasury order. National museums and galleries cannot precept on local authorities and are unrelated to local authority funding requirements. These long-established rules have been strictly applied to many applications for admission from non-departmental public bodies, a

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category which includes our national museums and galleries and they have all been rejected. The Charity Tax Review Group has been in negotiation with Customs and Excise and has been firmly told that it cannot be extended to it.

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