Arts to lose lottery cash to taxman

Sporting and arts establishments recieving huge lottery grants have been caught up in a Budget change which may leave them losing millions of pounds in tax benefits.

A reduction in tax allowances announced in the Budget means that hard- earned funds risk being snatched back by the Treasury.

London's Sadler's Wells is the first to fall victim to the Budget plan, which is intended primarily to change the tax benefit given to long-term industrial investment projects - like power stations.

A pounds 40m redevelopment project for the London theatre has already received pounds 30m in lottery funds.

With the active encouragement of the Department of National Heritage, the theatre has so far raised almost pounds 5m in cash donations and pledges, and it had been hoping to raise guarantees for the rest of the cash through a leaseback deal with a bank.

However, the Budget change has made the Sadler's Wells deal considerably less attractive because money raised through leaseback is now classed as taxable income, leaving the theatre short of its immediate target.

Ian Albery, chief executive of Sadler's Wells, told The Independent: "It's a bloody business, and makes things twice as hard for us.

"In essence, the security may only be partially realised, and it leaves us on something of a knife-edge. But I'm not having sleepless nights, and we will win through. We will complete the project, on schedule, in October 1998."

An Arts Council source said the Treasury already planned to exclude investment in machinery and equipment used in homes, shops, showrooms, hotels and offices, and shipping and railway assets were also exempted.

But he warned: "Unless the exclusion includes arts projects funded by the lottery, a number of current and future plans may be placed in serious jeopardy.

"The additional revenue forgone by extending the exclusion to arts venues would be a fraction of the costs already forecast, and for which it would be a grave disappointment to prejudice such worthy and popular developments."

However, an Inland Revenue spokesman said: "Theatres and sports redevelopment schemes are not treated any differently from any other business in this respect."

One arts source complained strongly that it was a classic case of one hand in Whitehall not knowing what another hand was doing.

While Virginia Bottomley, Secretary of State for National Heritage had been encouraging sport and the arts to develop "partnership finance" with private backers, the Treasury was actively engaged in setting up a tax deterrent.

A spokeswoman for the Department of National Heritage said: "This is a matter for the Treasury. We cannot comment."

When told that the Inland Revenue had said it would offer no prospect of relief, she repeated twice: "This is a matter for the Treasury. We cannot comment."

In a Treasury briefing note on the initial proposal, announced in November's Budget by Kenneth Clarke, Chancellor of the Exchequer, it was said that the tax penalty would apply "only to companies that invest heavily in long-life assets".

But Treasury minister Michael Jack has told Lord Gowrie, chairman of the Arts Council, that he holds out no hope for relieving theatres from the measure.

Mr Albery said that the Sadler's Wells project was continuing, and that the show would go on.

"Demolition is complete, the excavations have been carried out, and the foundations are being laid. We have even drilled a 600-foot bore-well so that we can have our own water."

Water out of stone is one thing; extracting tax relief from the Treasury is much more difficult.