The economic crime levy – a significant blow for the British art market on the horizon?
Earlier this year the Chancellor unexpectedly announced the Government’s intention to impose an anti-money laundering levy on banks, insurance companies, law firms and all other businesses in the regulated sector for anti-money laundering: since January 2020, that regulated sector includes the British art market. It appears there had been some discussions about this with other regulated sectors in 2019, but as the art market was not in the regulated sector then, it had not been consulted and was not aware that this worrying proposal might surface.
The Money Laundering Regulations 2019, effective since 10 January 2020, regulate art market participants for anti-money laundering, effectively imposing on art galleries, art dealers, auction houses and other art related businesses the same compliance obligations as those placed on banks, insurance companies, accountancy firms, estate agents and law firms. As Constantine Cannon Art Group Partners Pierre Valentin and Azmina Jasani explain, art businesses must now conduct due diligence on their clients before concluding one-off transactions above 10,000 euros or where the relationship with the customer is expected to have an element of duration. This requires art market professionals to introduce new business processes designed to comply with the Regulations, to identify clients and independently verify their identity, to train staff and to keep records. The upfront cost of compliance and the annual cost thereafter will not be insignificant. There is also a requirement to register for supervision with HMRC at a cost per annum of £300 for each premises where the business carries out activities covered by the Money Laundering Regulations. If a dealership has three galleries in the UK, the current annual cost of supervision for anti-money laundering will be £900.
Despite the art market’s recent economic difficulties as a result of the coronavirus, as if the new level of regulation introduced at the beginning of the year were not enough, art professionals and organisations may be dealt yet another financial blow. The Treasury now wants all businesses in the anti-money laundering regulated sector to contribute directly to the National Crime Agency (NCA)’s budget through an annual levy. The new levy, intended to finance more investigators and technology for the NCA, may become payable as of April 2022.
The Government launched a consultation on the proposed levy and, while there is no indication what proportion of the levy might fall upon the art market, it is understood that the British Art Market Federation, leading dealer associations and the major auction houses are submitting responses to express their deep concerns about both the principle of the levy and the mechanisms proposed for assessing it.
The Treasury is seeking views on the following aspects:
- the levy principles;
- what the levy will pay for;
- how the Government can ensure there is transparency over levy spending;
- how levy liability will be calculated, and which businesses should be paying the levy; and
- how the levy will be collected and enforced.
The Treasury discusses a range of metrics that could be used to calculate levy liability, including fixed charge, fixed charge bands based on the size of business, number of suspicious activity reports made, or revenue, but makes clear that its preferred basis is revenue in the United Kingdom. The consultation is asking stakeholders, among other issues, whether liability should be derived from a fixed percentage of a business’s revenue or whether it should create various revenue bands. Issues include whether liability should be calculated in relation to United Kingdom businesses’ global or UK sourced revenues, and from regulated activities only or total revenues including from unregulated activities. For some businesses such as auction houses which have international operations comprising both regulated and unregulated activities (intermingled), the issues are of fundamental importance, and the levy could create a major disincentive to doing business in or with the United Kingdom. One of the significant concerns for the art market is the use of revenue as a metric at all, given the variety of ways in which art business account for their businesses. There appears to be quite a discrepancy between other regulated sectors such as banks, lawyers and accountants which provide services and receive fees, and the art market which is selling goods as well as supplying services. Dealers for example, derive revenue from a mixture of fees and margins on sales and purchases, leading in some instances to the value of art being transacted being included for accounting purposes in the “revenue” of the business buying and selling the art. It would be palpably unfair to assess the levy on “revenue” including the value of the underlying art being bought and sold.
The Treasury is also considering the inclusion of an exemption threshold. It is seeking to ascertain whether the relevant threshold should be set at £1 million, £5 million or £10.2 million of revenue in the United Kingdom. If the Government adopted a £10.2 million revenue threshold, approximately 3,500 businesses from across different sectors (out of the total of around 90,000 businesses regulated for anti-money laundering purposes) would be subject to the levy.
The consultation is open until 14 October 2020.
Sectors other than art have urged the Government to carefully consider how it would apply the new levy. In response to the Treasury’s plans, the lawyers’ professional body, the Law Society, has suggested to impose the charge only on organisations required to register with the Financial Conduct Authority (FCA). An overwhelming majority of law firms, which are not registered with the FCA, would certainly favour this approach, as would art market participants.
The art market in the UK has suffered over the past few years as a result of the commercial uncertainty arising from Brexit but also, as a sector characterised by strict confidentiality, from the need to adapt to the new anti-money laundering regulations. While other regulated sectors will have suffered from the effects of the pandemic, this has had particularly damaging effects for dealers, galleries, museums and other art market participants, relying as they do on human contact with the art and with other market participants, and on events such as art fairs, exhibitions and previews. Under the circumstances, the proposed levy would likely harm the UK art market even more as it struggles to recover from challenges both economic and political.
The Government’s consultation refers to an “industry contribution levy” that is payable by medium and large organisations in Australia. We note, however, that those organisations must either have earnings of 100 million Australian dollars or more, make a large number of transaction reports or those reports must concern transactions of a particularly high total value. The consultation makes no reference to other countries, and to our knowledge, no other EU country has introduced a charge such as the proposed economic crime levy.
In essence, the proposed economic crime levy is a tax on risks associated with money-laundering and financial crime. Money-laundering is just one of the many risk areas that businesses encounter. There are also human rights, the environment, safety of products or health & safety. Such risks are, however, normally addressed through general taxation. Take passenger safety in civil aviation, for example: airplane manufacturers and air carriers are subject to a vast array of regulations concerning passenger safety. Similarly, banks and law firms for instance, are subject to the layers of anti-money laundering regulations. There is, of course, a cost to business of regulatory compliance. Now, on top of those costs, the Government is proposing to tax businesses who must comply with the same anti-money laundering regulations. Imagine, for example, manufacturers of airplanes being required to pay a passenger safety levy, in addition to complying with all their existing compliance requirements. That would be inconceivable, notwithstanding the many serious concerns surrounding that sector in the recent years.
There is no doubt that the proposed levy is deeply flawed in concept and its timing likely to be extremely damaging. The Government is resisting calls to increase the rates of taxation. Introducing new ad-hoc taxes through the back door will fool no one. Further, there is something profoundly shocking about bringing an entire industry within a regulated sector, then almost immediately before the effects of such regulation can be assessed and at a time of considerable hardship, proceed to tax it for the privilege of being regulated. This gross unfairness was arguably one of the hallmarks of the Poll Tax, a highly controversial government policy under Mrs Thatcher that contributed to her down fall after more than 10 years in office. Let’s hope that if this Government pushes through with the economic crime levy, the British art market will be exempt. If not, this levy might well cause significant damage to one of the few markets where the United Kingdom has a leading global presence.
By Pierre Valentin and Samuel Milucky