Lee Knights explains how dance schools have been hit by a recent tax ruling – and what teachers can do to protect their businesses
Unless you are a lover of belly dancing, odds are you haven’t heard of Audrey Fleur Estelle Cheruvier. Three years ago, Fleur Estelle – a world-renowned belly dancer – moved centre stage in the dance world when she lost her case at a tax tribunal. Tax inspectors ruled the 28-year-old teacher and performer had to pay a £52,000 VAT bill on the grounds that belly dancing was recreation, not education.
It was January 2014 when Estelle – who has performed for audiences including television stars Alan Titchmarsh and Gordon Ramsay – lost her appeal to overturn a backdated VAT assessment. Talking to the Evening Standard afterwards, she said: “It was a shock. It’s been tough, but sometimes you learn the hard way. I hope others can learn from it because you don’t always realise what you’re liable for and what not, you just take the advice of your accountant.”
Three years on, her words ring with prescience. Currently, two prestigious ballroom and Latin dance schools in the north of England are under investigation by HMRC (Her Majesty’s Revenue and Customs). While one of the schools faces a VAT claim of £80,000, the other has been slapped with a bill of £200,000. These are not isolated cases. Reliable sources tell Dancing Times that at least four other dance schools have been hit with substantial VAT bills. They face preliminary hearings with VAT officials that, if unsuccessful, will lead onto tax tribunals. None of the schools wants to be named.
Only a small number of dance schools and teachers are going to show up as blips on tax inspectors’ radar. First off, to be targeted, schools have to achieve a turnover of £83,000, hitting the VAT threshold. The majority of dance teachers, running modest businesses and operating way under this figure, will be unaffected. Those in the tax inspectors’ line of sight, however, need to be on the alert. It is important to bear in mind that turnover is not profit – VAT is payable whether you make a profit or not.
While Estelle’s shimmies and undulations first attracted the attention of tax inspectors, their focus has now shifted to private tutors in the dance, fitness and activity worlds. The crux of the matter is the way dance and other activities are classified for tax purposes. According to HMRC regulations, education is exempt, while recreation carries a liability. Estelle’s representatives argued that belly dancing was a “serious and systematic course of study” and that she should be given the same VAT exemption as tutors in more mainstream subjects. Judge Edward Sadler disagreed. “Most forms of dance are inherently recreational, that is, for the enjoyment and satisfaction of the participants rather than for their intellectual development.”
Estelle – who three years on still runs London’s Fleur Estelle Dance School – told Dancing Times that the actual VAT bill she had to pay was considerably in excess of the £52,000 figure quoted in the press at the time. “I have no idea where they got that figure,” Estelle said. She went on: “Belly dancing is an art form and so can be educational, too. It depends how you define what is educational. If someone can learn a skill from a school like mine and then use it to make a part-time or full-time living, that’s educational, because I’m teaching people a skill.”
Getting wind of members’ concerns and worries, professional awarding and national dance bodies met towards the end of 2015. Here, representatives weighed in with a substantial war chest geared to challenging HMRC’s classification of dance for tax purposes. Not all governing organisations, however, agreed to take part in collective action.
A major stumbling block was that HMRC has different boxes for different dance styles. HMRC classifies ballet and drama as exempt from VAT, ticking these as education. Ballet and drama leaders opted out as they considered members would not be impacted.
A breakthrough came in February, when the Sports and Recreation Alliance joined the fray. They brought in top central London chartered accountants and tax advisors Haysmacintyre to help de-muddy the deep waters of VAT. Haymacintyre’s Phil Salmon confirmed that tax inspectors were targeting private tutors operating as sole traders. “HMRC have not announced any change of policy, or stated they are targeting dance schools, but this certainly appears to be an issue,” Salmon said.
Evidence tax inspectors are running a campaign against private tutors has shown up recently with three schools brought to account over VAT liability. All three – running motocross, yoga and pilates businesses - lost their appeals and had substantial VAT bills levied against them. “None of the individuals concerned were properly represented; anyone going to court in future should have proper representation,” Salmon stressed.
Recent changes to the interpretation of VAT regulations have led to confusion over which privately tutored activities are exempt. To add to the bitter pill, HMRC is able to back-date payments by up to 20 years. “HMRC are taking a tougher view of how the exemption for private tuition should apply,” Salmon explained.
According to tax rules, private tuition counts as education in subjects that are ordinarily taught in schools and universities. Dance instructors, teaching most of the A-Z of styles, from Argentine tango, to ballroom and Latin and zydeco – are excluded. They are classified as recreation and liable for VAT. For the two unnamed ballroom and Latin dance teachers facing substantial VAT bills, events have moved on. At preliminary hearings, both schools failed to have assessments overturned and now await dates for tax tribunals.
Having come through a two-year investigation and in the end losing her tax tribunal, Estelle had some hard-earned advice for others. “Most people are like me at the time – they don’t know about VAT and rely on their accountants. After it happened to me, my biggest learning curve was rethinking how I managed profit and loss in my company. I’d be happy to talk to anybody in this position, let them know they’re not alone and even if you lose a tax tribunal, it doesn’t have to be the end.”
Key steps for dance teachers worried about VAT rules:
* Only dance teachers and performers with a turnover of £83,000 or more are potential targets for VAT claims
* Only dance teachers who are sole traders or partners in a partnership are at risk from the current campaign
* Remember turnover is not profit – your actual profit may fall well under the VAT threshold. You are liable for VAT whether you make a profit or not
* Most dance teachers with modest businesses operating way under the VAT threshold are unaffected
* Dance teachers already facing VAT claims cannot make changes to their accountancy reporting practices and de-register for VAT. Claims will go forward on the existing basis of the business
* If you are concerned you may be impacted, it may not be enough to rely on your regular accountant: seek out expert help
* Not registering for VAT if your turnover reaches the threshold will not protect you from investigation
* Dancers with thriving businesses edging towards the VAT threshold are advised to consider whether it is possible to re-structure to pre-empt any future claims
This article was first published in the April 2017 issue of Dancing Times and is reproduced here with permission of the author, Lee Knights, and the editor, Jonathan Gray. Not for reproduction by third parties.