Economics Market United Kingdom

Where do all the profits go?

The spotlight on how much corporation tax is paid by UK companies is turning towards art dealers

Profitability, and thus tax paid, varies depending on deals with offshore ventures

As companies including Starbucks, Amazon and Google face daily scrutiny of their UK corporation tax bills, how do commercial galleries with businesses juggle their tax payments? The answer, as ever in the art market, is clear as mud, but shines a light on how easily profits could be moved between countries now that art galleries have expanded and moved away from the sole-proprietor models of the past.

Hauser & Wirth, whose parent company is in Switzerland, made UK sales of £33m in 2011 (more than four times its 2010 turnover of £7.7m) but paid no corporation tax in the UK, according to the most recent accounts filed at Companies House. These show a loss of £534,006 in the gallery’s British business last year.

In its director’s report, Hauser & Wirth says its losses stem from a £40m increase in overheads due to the launch of its 15,000 sq. ft space on Savile Row in October 2010. A spokesman for the company adds that UK staff numbers have since increased from 35 to 76.

Another reason that Hauser & Wirth’s British wing is running at a loss in the tax year in question is that its “cost of sales”—essentially the direct cost of all art to the gallery—was £25.4m. The bulk of this cost (£23.9m) was for art bought by the UK subsidiary from its parent company, Galerie Hauser & Wirth AG, based in Switzerland. This is a legal transaction, but if the art cost the UK group more than its Swiss parent company originally paid, any profits accrued would be liable to lower corporation tax rates, while also limiting the UK business’s profits. In the UK, the effective 2011 corporation tax rate was 26.5%, while in Zurich, it was 21%, according to the accountancy firm KPMG. A spokesman for the gallery says the corporation tax rates of the UK and Switzerland are “broadly similar” and that “there would be little tax advantage arising out of the UK company purchasing the works that it sells from its Swiss parent company”.

He did not comment on whether the £23.9m paid to Galerie Hauser & Wirth moved profit to Switzerland, or on the overall profitability of its Swiss branch, but a spokesman says that for “historical reasons, as well as issues concerning inventory, storage, archive[s], the publishing department, photography and artist relations, works are consigned centrally through Zurich as the gallery’s longstanding hub”. He says that “Hauser & Wirth’s London gallery is fully compliant with UK tax law and takes its tax obligations very seriously”, adding that these accounts look at just one year in isolation, whereas the company paid £1.7m in corporation tax between 2009 and 2011.

Meanwhile, another company that appears from its Companies House accounts not to have paid UK corporation tax is Blain Southern, whose controlling company, BBB Capital Invest­ments Ltd, is registered offshore in Jersey. The company filed accounts for a 17-month period ending in December 2011 showing an operating loss of £2.1m, despite a turnover of £75.4m. The company also operates in Berlin and New York, and moved to a permanent space in London’s Hanover Square in October.

The 2011 accounts also indicate that Blain Southern may have more to worry about than its tax bill. As well as the £2.1m loss, the UK group had net liabilities of a further £2.1m. These, in part, prompted its accountant, Rawlinson & Hunter, to say in its auditor’s report that there was a “material uncertainty which may cast significant doubt [on] the group’s ability to continue as a going concern”, although it continues to be financially supported by BBB, which is owned by Harry Blain, the gallery’s co-founder.

Blain says that although these UK accounts are correct, the group is “absolutely fine as a whole”. He says that “running the UK gallery at a loss is not an objective… these were expected legitimate losses in line with our forecasts”. He adds that the Jersey holding company pays full UK corporation tax, although he did not say how much.

Blain Southern’s accounts also show that the UK business made sales to its secondary market subsidiary in the US (Blain Di Donna LLC) worth £980,488. Blain says this represents one work that was sold to New York because that was where its sale was arranged. “It’s a very simple structure, not set up for tax reasons,” Blain says. He did not comment on any difference between the amounts for which the work was bought and sold. “It did show a profit but I don’t want to give information on margins,” he says.

Accounts show that other London-based galleries regularly sell works to their international counterparts. The two eponymous directors of Monika Sprüth & Philomene Magers Limited (which trades in London and Berlin as Sprüth Magers) sold art worth £1.4m during 2011 to two related businesses in Germany, according to accounts for the year ending 31 December. The gallery did not comment on these transactions. A spokeswoman says: “This gallery is a UK company and is in complete compliance with UK tax law and takes its tax obligations very seriously.” The gallery paid UK corporation tax of £81,974 on profits of £317,116 from a turnover of £12m.

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Comments

28 Dec 12
21:30 CET

ALEX NOVAK, CHALFONT, PA

Sprüth Magers only makes 2.64% on revenues of 12 million pounds? That's nuts. Why do they bother to stay in business? The art business can and should be fairly profitable if run correctly. You wonder what these big name galleries are doing.

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