It opened on 20 April 1927 as a members-only club for the performance of unlicensed plays, thus avoiding theatre censorship by the Lord Chamberlain's office. It was one of a small number of committed, independent theatre companies, including the Hampstead Everyman, the Gate Theatre Studio and the Q Theatre, which took risks by producing a diverse range of new and experimental plays, or plays that were thought to be commercially non-viable on the West End. The theatrical producer Norman Marshall referred to these as ‘The Other Theatre’ in his 1947 book of the same name.
The theatre opened with a revue by Herbert Farjeon entitled Picnic, produced by Harold Scott and with music by Beverley Nichols. Its first important production was Young Woodley by John Van Druten, staged in 1928, which later transferred to the Savoy Theatre when the Lord Chamberlain's ban was lifted. In 1938 a four-week revival of the Stokes brothers' Oscar Wilde, starring Francis L. Sullivan and produced by Ronald Adam, opened on 25 October. This coincided with a Broadway production of the play. In 1942 Alec Clunes and John Hanau took over the running of the theatre and for ten years produced a wide range of plays, winning a reputation as a 'pocket national theatre'. In 1946 Clunes teamed with author Peter Elstob to raise £20,000, which eventually put the theatre on a sound financial footing.
Ronnie Barker made his West End début at the production of Mourning Becomes Electra at the Arts Theatre in 1955 which was directed by Sir Peter Hall, with whom Barker had worked at the Oxford Playhouse. Barker remained a West End actor for some years, appearing in numerous plays between 1955 and 1968. These included two performances each night as he played a gypsy in Listen to the Wind at the Arts Theatre in 1955. In August 1955, aged 24, Hall directed the English-language premiere of Samuel Beckett's Waiting for Godot at the theatre. This was an important turning point in modern theatre for Britain. Subsequently, from 1956 to 1959, Hall ran the Arts Theatre.
According to Who's Who in the Theatre (14th and 15th editions), between April 1962 and January 1967 the Arts Theatre was known as the New Arts Theatre.
From 1967 to 1999 the Arts also became a home for the Unicorn children's theatre, under the direction of its founder Caryl Jenner who took over the lease. Meanwhile adult performances continued in the evening, including Tom Stoppard's satirical double-bill Dirty Linen and New-Found-Land which, opening in June 1976, ran for four years at the Arts.
The theatre's lease was taken over by a consortium of UK and US producers in 2000 for a five-year period, and it was relaunched as a West End theatre with the anniversary production of Julian Mitchell's play Another Country, directed by Stephen Henry. Notable productions during this time included Closer to Heaven, the Jonathan Harvey/Pet Shop Boys musical, and The Vagina Monologues.
In 2011 the theatre was taken over by JJ Goodman and led by Artistic Director Mig Kimpton. The Arts now operates as the West End's smallest commercial receiving house, seating a maximum of 350 in a two-tier basement auditorium.