On June 23, 2016, 52 percent of the British people voted to leave the European Union, much to the surprise and dismay of world leaders, leading economists, the British Government, the financial services industry and the majority of Londoners. The impending threat of Brexit has led to some troubling volatility over these past few months, with the value of the pound tumbling below record levels, the Bank of England reducing the base rate and introducing other forms of quantitative easing, employers signalling hiring cutbacks and Standard and Poor downgrading Britain’s credit rating. In addition, it’s led to a shift in the British art market.
Short-Term Brexit Blues
The short-term implications of Brexit on the British art market show signs of a slowdown. Immediately after the vote, auction houses in London hosted their annual Impressionist, Modern and Contemporary sales. Given the cheaper pound, international buyers looking to London for bargains helped bolster these sales. Nevertheless, while some artworks sold well, surpassing their high estimates, overall the sale levels were considerably lower than in 2015. Many lots failed to sell altogether. Lower sales levels were also partially due to the fact that fewer lots were offered. Sellers are waiting for the volatility to subside before presenting their best pieces to the market. There’s also a general decline in the level of auction guarantees being given by houses and, as a result, collectors are either waiting to sell or selling privately through dealers.
Long-Term Effects of Brexit
It’s difficult to predict the long-term effects of Brexit on the British art market, the second largest in the world by some measures, as they depend on a series of unknowns, including whether Brexit will happen and whether and how the British government will regulate the art market. If Brexit happens, then EU regulations that the British art market lobbied against, but was forced to adopt, such as the artists’ resale rights, import value added tax (VAT) and the export license scheme, will likely be revisited. According to Arts Council England, across 2014 and 2015, “Creative Europe has supported 230 UK cultural and creative organisations and audiovisual companies as well as the cinema distribution of 84 UK films in other European countries with grants totalling €40 million.” Post-Brexit, this funding will cease to benefit Britain and British art. There’s concern among British museums that the spirit of good will that currently exists between the various institutions across the EU and Britain might be compromised as a result of Brexit, thereby affecting cross-border loans and other important partnership initiatives.
Artists’ Resale Right
Artists’ Resale Right (ARR) was introduced in Britain in 2008 by means of a Directive of the European Union. ARR mandates payment of royalties to artists or, if the artist is dead, his heirs or estate, for 70 years after the artists’ death each time their works resell. ARR is levied at 4 percent on a sale price between €1,000-€50,000, with a sliding scale that reduces the royalty payment to 0.25 percent on sale prices of more than €500,000. British dealers had aggressively lobbied against the implementation of the ARR, arguing that it would impede London’s ability to properly compete with other art hubs like New York and Hong Kong. Even Tony Blair, Britain’s Prime Minister at the time, had resisted the implementation of ARR, but the Council of the EU outvoted him.
If Britain leaves the EU, it will no longer be bound by EU directives and regulations. As a result, it’s likely that the British Art Market Federation and other key and influential players in the British art market who’ve opposed ARR all along will lobby the government to scrap ARR in its entirety. Many British artists and artist societies support ARR, so the British Government’s decision to scrap or keep ARR certainly won’t be an easy one.
In 1995, Britain had to introduce import VAT on art, antiques and collectibles under the EU’s VAT harmonisation programme. Unless exceptions such as the Temporary Admissions scheme apply, any item imported into Britain from outside the EU is subject to import VAT. The import VAT rates within the EU vary from country to country, with Britain applying the lowest rate of 5 percent on all art-related imports. British dealers were against the implementation of, and continue to push against, import VAT, arguing that such tax liability drives international buyers and sellers away from London. British dealers have also complained that there’s a plethora of paperwork that needs to be maintained when it comes to tracing import VAT and that they often have to absorb the costs of import VAT when selling to EU buyers, to whom they can’t charge import VAT. All this, British dealers argue, can be expensive and cumbersome. Thus, it’s likely that British dealers will again lobby the British Government to do away with import VAT altogether to the extent it applies to art, antiques and collectibles.
Export License Scheme
Britain’s export license scheme came into effect as a result of a Regulation enacted by the EU in the early 90s. The scheme provides an opportunity for Britain to retain cultural goods judged to be of outstanding national importance that would otherwise be exported, allowing them to screen each request seeking an export license and determine whether to grant the license or to begin a review process that may result in the work being purchased by the British Government or someone in Britain. Under the regime, the British Government is also precluded from granting licenses for items that were illegally taken from other EU countries. This scheme, some argue, has led to administrative hurdles and substantial paperwork that don’t exist in other international cities like New York and Hong Kong. It’s also argued that due to the export license scheme, sale transactions are needlessly forced to slow down, when parties are usually keen for a quick turn-around. Post-Brexit, there will be certainly be discussions on the need to revisit the export license scheme.
As explained above, post-Brexit, EU’s funding of British arts will come to an end. It’s unclear whether the British government will then support British arts to the same degree as the EU and properly fund important programs and talent, as is very much needed. We know that a lack of funding can lead to a brain drain of talent, a risk that Britain can’t afford to take.
Also of note is a warning from the Museums Association that the immediate economic fall-out of Britain leaving the EU could have grave and negative consequences for the museum sector. The Art Fund, set up to support museums and galleries in England and help them buy and display great works of art, also issued a statement expressing concern stating, “[a]t one level there is obviously now great financial uncertainty - the effect on European funding streams for the arts, for example - but quite as important is the potential effect on the spirit that drives a myriad of international partnerships in the arts. These are driven at heart by the principle of Britain as a collaborative component of, and participant in, a vibrant European culture. We must work hard to keep this spirit alive, regardless of politics.”
A Tumultuous Start
The reality is that we won’t know the full impact of Brexit on the British art market for years to come. What we do know is that, in the wake of long-term uncertainty, things are off to a tumultuous start. Whatever the outcome, Britain has profoundly changed.
Azmina Jasani is Senior Associate at Constantine Cannon LLP