Accounting for the fine arts industry

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Accounting and art sound like they should go together about as well as a bowl of soup and a fork.

Creativity is frowned upon by HMRC when it comes to tax returns, and artists aren’t famed for their stringent record-keeping. But when artists decide to turn their passion into pounds, they’re agreeing to the same accounting obligations as any other business.

The UK has a globally recognised pedigree for art. Creative industries account for one in eleven jobs and the sector contributes £10m to the economy every hour. Not only is fine art big business, it’s also growing.

Painting by numbers

Last year, the industry grew at twice the rate of the general economy as people flocked to exhibitions all over the country. The Tate Modern and National Gallery alone welcomed over 12 million visitors. After all, art is nothing without an audience, and dealers and exhibitors need strategic advice just as much as the creators themselves.

With the government seeking to further stimulate artistic revenue by a variety of methods, such as offering tax relief incentives to encourage touring exhibitions, there is a gap in expert knowledge that savvy accountants can occupy.

“Artists work in an environment where they often aren’t well-remunerated, so many try to do the accounting work themselves,” says Mahmood Reza, owner and manager of Leicester-based firm Pro Active Resolutions, which specialises in providing accounting and business strategy services for artists and galleries.

“Advisors must understand the nuances of the arts industry, adapt their knowledge and not simply impose their experience of other businesses.”

Expenses, for example, are only tax-deductible when incurred entirely in the interest of business. Unsurprisingly, the core materials that an artist buys, like brushes and clay, are expensable, but it’s less obvious that a shirt falls under the same bracket if purchased specifically to be worn while they work.

Similarly, any artist whose studio is in their own home can claim pro rata portions of their utility bills and even mortgage or rent. The complex contingencies that govern what qualifies as an expense can be tricky to figure out, so the time and effort that artists can save by enlisting an accountant justifies the investment.

The price of passion

Most art is meant to evoke strong emotions, yet working with artists doesn’t have to be maddening. The relationship can be harmonious if you’re selective over who you take on as a client and ensure that you offer them personalised, respectful advice.

“Because artists understand that they don’t know about accounts, sometimes they can actually be better clients,” explains Tim Alter, director of Alterledger, an accountancy firm in Glasgow that specialises in the creative industries. “An entrepreneur who thinks he knows everything is harder to deal with, whereas if I tell an artist something, they usually believe it.”

Once the artwork is produced and it comes time for it to be sold, fresh challenges arise for accountants to tackle, not least of which is the delicate matter of advising on valuation.

“If clients want to target a certain income, pricing is key because there’s no set market for art,” says Alter. “It’s not like selling crisps, where you can go into a supermarket and see a clear value. With art it depends on what people will pay for it, so we provide reports to help clients inform their pricing.”

However, there’s not always a set price, especially with resales. At auction, it’s not uncommon for some pieces to garner millions. Sotheby’s traded over one billion pounds of artwork last year, with the UK ranking third globally for auction revenue. The taxes in such deals are immense, and leveraging relief schemes provides greater value for collectors and dealers alike.

Artwork sales qualify under a governmental VAT margin scheme, allowing the VAT due from a sale to be calculated on the difference in price between purchase and sale. For instance, a sculpture purchased for £4,000 and sold for £6,000, only requires VAT on the £2,000 balance between those figures, rather than the total sale value.

Accounting for artists won’t always be a lucrative path. There are a thousand busts for every Botticelli, and backing a success is as much art as science. Devotion is at the heart of an artist’s work, and accountants have to be just dedicated to the field to draw the maximum value possible.

“I love the sector’s plurality, diversity and people,” says Reza. “It might be a long haul, but there are great opportunities in the artistic landscape.”

Jake Barret-Mills is a freelance writer and researcher based in Norwich. He reports on finance, business development and social policy for Flibl.

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