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Our client is a professional artist in his 80s. He was called up into the army in 1939, when he was still an art student. He became a prisoner of war with the fall of Singapore in 1942, and spent the rest of the war in Japanese labour camps, working on the notorious Burma-Thailand Railway and in hospital camps. Under appalling conditions, he secretly kept a record of his experiences in the form of paintings, drawings, notes and sketches.
Our client is a professional artist in his 80s. He was called up into the army in 1939, when he was still an art student. He became a prisoner of war with the fall of Singapore in 1942, and spent the rest of the war in Japanese labour camps, working on the notorious Burma-Thailand Railway and in hospital camps. Under appalling conditions, he secretly kept a record of his experiences in the form of paintings, drawings, notes and sketches.
With the Japanese capitulation in 1945, he returned to the United Kingdom and resumed his art studies, and became a distinguished artist and art educationalist. Little interest was shown in his prisoner of war records and they were stored in a cupboard for 40 years. However, as a result of an exhibition in 1987, increasing interest was shown in the work, and they were recently sold for a six-figure sum at an auction house.
The work at the auction was divided into 49 different lots. 42 were sold for under £6,000 each, and six for over £6,000. One work was unsold. Some of the work was purchased by major British museums, and some was bought by an Australian company which then gave it to the Australian nation. The rest were sold to private individuals.
Since the work was created when our client was not practising as an artist, and was not created with the intention of reselling, it would seem to us that this should not be treated as part of our client's Case II income. If this view is correct, the transactions would presumably need to be considered as falling into the capital gains tax area.
Our query, therefore, is whether the individual lots selling for less than £6,000 can be considered as exempt chattels, or whether they may be considered as forming a set, which might bring into charge the sales to the museums and the Australian company.
(Query T16,131) - Charlie Parker.
Dealing first with the question of whether the client was trading, the items sold, i.e. the paintings, are the same product as that which forms the basis of the client's profession. In support of an argument that the proceeds are therefore trading income, the Inspector might try to put forward the case of Wain's Executors v Cameron [1995] STC 555. This case dealt with the sale by an author of working papers created in the course of his work as an author; in that case the court held that anything produced in the course of that profession would be taxable on the taxpayer.
The distinguishing factor that I would bring into play here is the question of whether, at the time that the paintings were created, he had a profession as an artist. From conversations in the past with a relative who was imprisoned in a Japanese prisoner of war camp, the internees only had one aim and that was to live to the end of the day. Anything more than that was a bonus and so to suggest that the client was a professional artist would be insupportable. Consequently, I would agree with 'Charlie Parker's' opinion that the sale of the paintings could not be trading income.
'Charlie Parker' is right to be concerned that the Inland Revenue might try to suggest that some of the paintings could form sets. The rules governing when two or more disposals of chattels shall be deemed to be one sale of a set are contained in section 262(4), Taxation of Chargeable Gains Act 1992. The seller must be the same person and the purchaser must be one person or more than one person acting in concert.
The Inland Revenue's Capital Gains Tax Manual, at paragraph CG 76632, also indicates that the Revenue will only treat chattels as a set if the assets are similar and complementary and their value taken together is greater than their total individual value. If the client was drawing pictures of his surroundings, the paintings will of necessity be similar. However, it is not certain that the total value of the paintings sold to, say, the company, will be more than the individual value of those paintings.
If the paintings are found to form part of a set, in calculating the gain on that set a value of the set at March 1982 should be obtained. -Hodgy.
Extracts from further replies received:
On balance, there is a sustainable view that would consider the items described as a set and therefore the fact that individual lots were sold for less than £6,000 may have little impact upon the capital gains tax position.
The Inland Revenue manuals review this area in some detail, for example see paragraph CG76632 of the Capital Gains Tax Manual which confirms that a number of items can form a set if they are essentially similar and complementary and (my italics) their value when taken together (as a set) is greater than their individual values. Revenue Interpretation 208 provides further clarification and, although this is concerned with bottles of wine, it suggests that bottles from the same vineyard, even when of different vintages, might be regarded as a set for chattel exemption purposes. Equally (paragraph CG76635) items do not automatically become a set simply because they have been included within the same sale lot. - Rookery.
From the Revenue guidance at paragraph CG76633 of its Capital Gains Tax Manual, it appears that the special rules relating to sets would not apply and so each lot sold for less than £6,000 would be exempt. However, should the 42 lots in question not meet the necessary requirements, and also in respect of the items that were sold for more than £6,000, then it is possible because some of the works were sold to major museums that they would qualify under section 258, Taxation of Chargeable Gains Act 1992 for 'national heritage' exemption. Although the items have been sold without an application having been made, paragraph CG73320 says; If there has been no prior grant of conditional exemption, relief may be given by concession, provided that the price paid by the public body reflects the exemption'. - N.K.
It is considered that the works executed at a time when the client had not commenced his vocation, being fully constrained by his service duties, can in no way be treated as having been subsequently appropriated as stock in trade. Were the Inspector to pursue that line of argument, it would be frustrated by section 161, Taxation of Chargeable Gains Act 1992, which produces the same outcome at the time of appropriation as that resulting from the actual events, viewed as disposals to third parties of privately owned capital assets. - Elder.
Before and after war service, the client was an art student. While on war service, no matter what form it had taken, he would have wanted to keep his hand in as a student. Any student is willing - indeed, may try - to sell work; there is no supposition that work created by students is a capital asset and not able to produce income. Artists do not necessarily sell their work immediately when not painting to commission; sale may be subject to many factors - fashion, etc. - and may take years.
This client was, sad to say, in a situation where he could use his professional skill for making an unique record, which has now an historic interest making it saleable. Perhaps it was not saleable at once; perhaps he could not bear to look at it before; there was likely to be a lot of emotion involved. The fact is still that he is an artist selling his own work for a profit which is liable to income tax. - W.T.G.
I assume that the client is, or has been, VAT registered. Even if he has deregistered because, in his old age, his output has slowed up or he has never been VAT registered at all, the turnover resulting from the auction has potentially made him liable to register.
'Charlie Parker' mentions an exhibition, presumably of the material now sold and presumably also put on as part of the business activity with other work on display. Consider the trap created if the owner of a stately home opens it to the public. Furniture, which has been in the family for centuries, is regarded by Customs as a business asset once it has been on display. See Notice 701/12.
Alternatively, no output tax is due if no input tax was ever recovered on the acquisition or ongoing maintenance of the asset. However, what the Notice fails to point out is that this is because the transaction is still a business one but the sale is exempt under group 14 of Schedule 9 to the VAT Act 1994. That means that, potentially, there could be a loss of input tax on overheads under the partial exemption rules although, in many cases, the de minimis rule will save the situation.
If input tax has been incurred and recovered on an asset such as in framing a picture, which is then sold, Customs call it a VAT recovered asset. Notice 701/12 says that VAT is due on the current market value of the frame and on a proportion of the original labour cost.
VAT was probably incurred on the cost of preparing the material for the exhibition, since it is unlikely to have been suitable in the state in which it was taken out of the cupboard. If Customs did argue that the material was a business asset, they would then say that it was a VAT recovered one, even if that input tax was not recovered at the time. Thus, VAT could be due on a part of the sale value. - John Price.
