8 January 2020
There has been a general consensus that it is an anomaly that purchasing a digital copy of a publication is subject to VAT while a hard copy of printed matter is not. The Upper VAT Tribunal has now considered this point in respect of newspapers and ruled that this anomaly is incorrect.
The decision is in the public interest and arguably provides the right legal answer. It reflects a purposive rather than literal approach, seeking to achieve the legal result intended by Parliament. The case was as much about the basis of legal interpretation as it was about VAT law.
While the decision is likely to be appealed, it provides an opportunity for claims for overpaid VAT. Claims should not be restricted to digitally-supplied newspapers but to electronic publications that would normally be zero-rated for VAT purposes if delivered in hard copy.
What was the issue?
The law allows for the zero-rating of printed matter. This is because printed matter is regarded as physical goods rather than digital products which are considered services. As technology has advanced, this differentiation has created an anomaly. This is being addressed by the European Commission who recognise the problem and have taken prospective steps to ensure the same tax treatment of the same product being delivered through different medium.
As technology moves on and printed products decline, the applied VAT treatment changes the tax cost for publishers. The current tax position does not reflect the intention from either an EU or UK perspective, as there was never an intention to tax ‘knowledge’. But by default this was being taxed merely due to the method of delivery of what is predominately the same product.
HMRC fought quite hard to argue that the digital version was, in fact, different to the printed version. This is interesting as it suggests they were not confident of the main argument, which requires legal certainty.
What does this decision mean?
HMRC are unlikely to accept the decision of the Upper VAT Tribunal. They were successful at the Court of First Instance (FTT), which applied the legislation perfectly but with a literal rather than purposive approach.
If they wished, the decision provides scope for HMRC to regularise the treatment of hard copy publications with digital versions. It would seem reasonable that the VAT treatment should be the same.
So what publications could potentially benefit from this ruling? Digital books are the most obvious; magazines, including journals and publications; reports, including subscriptions. The best approach is to establish the VAT treatment of the hard copy product – if this is zero-rated, then the electronic product might enjoy the same treatment.
HMRC can expect significant claims where VAT has been accounted for on digital publications. These claims will normally cover a four-year period. HMRC have a possible defence to these claims (unjust enrichment) and the likelihood of success is subject to further litigation.
Protective claims against the four-year cap can be made but the penalty position must be managed. If claims are successful, then there may be compensatory interest payments due to official error, albeit the interest rate is very low.
This decision has the potential to impact on other reporting too – for example, MOSS scheme reporting, but this will be prospective. Organisations that provide publications as part of membership benefits may wish to consider their VAT accounting arrangements as there is scope to reduce tax costs.
Is the decision correct?
The arguments were presented by a leading silk and the judges could not have been more senior. The decision runs to 26 pages of complex yet concise legal argument reflecting the skill and ability of the cast involved.
The decision considered varied case law including, but not limited to, the treatment of caravans as determined by the European Court of Justice, an Australian Goods and Services Tax (GST) case relating to sporting publications, cases relating to education and nursing, among others, and the interpretative difference when considering reduced and zero rates.
It was telling that the decision refers to the role of the courts in reflecting and applying the intention of Parliament – a primary function that the judiciary rarely lose sight of. And, as always, taking matters back to basics – counsel even directed the judges to dictionaries to ensure the meaning of newspapers was properly understood.
It is likely the appeal will move directly to the Court of Appeal. Given the financial impact of the case and sensitivity this seems inevitable.
The bigger picture
VAT is a complicated tax. It is difficult, if not impossible, to simplify. It is therefore critical that advisers, the authorities and the courts retain sight of the principles and rise above the detail. This decision achieves that. I hope it survives scrutiny on review in the higher courts. Even if it doesn’t, it is good evidence of the legal complexities, the approach adopted by the judiciary, and the willingness to challenge perceived inequitable treatment.
This decision perhaps reflects the underlying trend in respect of tax compliance – large corporates are quite rightly criticised for failing to work within the spirit of the law. It has become a ’cause célèbre’. HMRC need to adopt the same approach and consider what did the EU and Parliament intend? There are restraints that HMRC have to be mindful of, so there is sympathy for the constraints they have to work within. They are the guardians of the Treasury and will be criticised if they fail to meet the obligations of EU law. Appropriate policy guidance is required.
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