Please don't charge the art industry VAT

We are all now getting to grips with the new VAT environment in the UAE. The new rules mean that an individual or company can be charged the five percent VAT on his product or service is if their total earnings exceed AED375,000. Many independent artists will fall outside of those parameters, of course, but galleries in the UAE will now qualify.

This is effectively putting a tax on our creative industry and, while some may argue that it is a commercial sector just like any other, I would say that the creative economy should be given as much chance as possible to succeed. Therefore, it should be exempt from VAT.

In 2015, I founded Mestaria, a company dedicated to giving artists exposure, revenue, security and, importantly, giving them time to focus on innovation through inspiration and application. We work hard with artists across the UAE to give them creative freedom. Mestaria, therefore, gets a uniquely intimate view of the visual arts segment of the creative economy and we handle industry concerns first-hand every day.

Artists continually struggle to make money. For them, it is essential to survive but not fuel for their creativity. Money is not oxygen to artists but more a shelter from the "harsh" environment of the commercial world. Taxation of any sort makes it harder to survive and justify a full-time existence as a creative – and surely we don't need to shackle our nascent artistic population further?

The UAE is gradually building a robust creative economy. If we look across the world, creativity underpins so much of the global economy. The biggest companies in the world – Google, Apple, Microsoft, I could go on – are all built solidly on creativity, of which the origin is artistic in some form or another.

While I support VAT and believe it is a necessary step for the nation, I suggest that by leaving artistic transactions out of the VAT ruling, the UAE could offer a boost to this sector and a huge opportunity for its growth.

Economics of art

The art market works in two major ways: primary and secondary. The primary market covers sales that benefit the artist directly – whether that be through a gallery, agent or other third party. There is also the secondary market, or "selling on" of an artwork, where an artist is not likely to profit other than an increased value – or perceived value – of their work in the market and where the price of an artwork inflates.

There is a reason to protect both of these transactions from VAT. Firstly, to give artists the chance to make money; secondly, to support regional auction houses and other secondary market outlets – both of which are an essential part of the art ecosystem. Furthermore, pulling art buyers from across the world to an entirely tax-free art sales environment would have huge benefits for the wider economy.

However, the realities of the art economy extend much further than what benefits the individual. Without galleries, most artists’ careers would not survive, so galleries need to be able to profit to ensure the survival of the artist.

In the modern digital age, this is a more complex and ever-evolving subject, but one thing remains true: art needs to be experienced in the flesh to be truly appreciated.

Therefore, galleries within the SME sector need help. Running an art gallery is hard at the best of times, since art is a purchase based on desire rather than outright need. Galleries rely on marketing and PR to attract clients and this is expensive.

Gallery spaces have to be a significant size to be taken seriously and to accommodate key artworks, and this also comes at significant cost. Then there's staff, logistics, insurance, framing and shipment. And, there is an ongoing need to invest speculatively prior to realising any revenue at all.

Most galleries run a "feast or famine" model, with high income during the peak times and much reduced revenue during quieter months or outside of key exhibition dates. With this in mind, VAT creates a range of problems for galleries: many of their suppliers (artists) are not VAT registered due to the threshold, so the gallery has to shoulder the full VAT bill – without being able to recover any of it. Finally, no gallery that I know of has a full-time qualified accountant on board.

The cost of VAT can of course be mitigated with a price increase across the board. But passing the costs on comes with a risk of reducing the number of deals a gallery can close.

I cannot comment on the complexities of how VAT exemption for the art economy could be administrated but I firmly believe that if there is one country that can achieve something unique and seemingly complex beyond expectation – if for no other reason to prove its intent and set a global standard – it is the UAE.

The challenge of VAT for galleries

Sharon Harvey, owner of Showcase Gallery, Alserkal Avenue, Dubai

I have had my gallery for 14 years and witnessed a tremendous expansion of both galleries and artists wanting to call UAE home. In 30 years here, I've seen art introduced to the school curriculum, seen the opening of The Louvre and watched Art Abu Dhabi and Art Dubai evolve into major events – and the broadening of minds and the linking of cultures they've enabled.

The government's efforts have been admirable, but the decision to apply VAT to the industry is broadly negative. In a gallery environment, a potential buyer will invariably bargain for the best price and often return to close the sale after reviewing prices on the internet. They will certainly not entertain the addition of an extra five percent because they are spending his money in the UAE. This will mean galleries will be forced to swallow that percentage.

Much of the art sold today has been acquired by galleries years ago, or acquired from artists without VAT registration, so the increase falls to the gallery. There will also be added costs for new accounting and payment systems – and all at a time when the financial challenges to both gallery owners and locally based artists is unprecedented.

I do not fundamentally disagree with the implementation of VAT, but this is an opportunity to drive much needed additional growth in our sector.

Peter Goodwin, CEO of Mestaria and CBDO of the ArteVue app.