VAT on digital publications – Upper Tax Tribunal says some can be zero-rated

13 January 2020

Addendum added 24 February 2020

The VAT liability of digital publications (previously treated as standard-rated for VAT purposes) has been an area of discussion for a number of years – their printed equivalents are treated as zero-rated, which is an obvious anomaly where the content is essentially the same.

A potentially significant judgement on this issue came when the case of News Corp UK & Ireland Ltd v HMRC was published in early January. The Upper Tier Tribunal (UT) ruled in favour of the taxpayer to say that digital publications can be zero-rated - overturning an earlier First Tier Tribunal (FTT) decision. Although the case is highly likely to be appealed by HMRC, for now, the UTT ruling creates a binding legal precedent for businesses to potentially rely on.

The case

The principal question at issue was whether digital versions of newspapers published by News Corp (principally The Times, The Sunday Times, The Sun and The Sun on Sunday) were “newspapers” within the meaning of Item 2, Group 3 of Schedule 8 to the VAT Act 1994 and were, therefore, zero-rated for VAT purposes.

The FTT had originally concluded that, although the digital versions were the equivalent of the newsprint editions, they were not “newspapers” within the meaning of Item 2. It held that the whole of Group 3 (except as otherwise provided for in the Notes) was confined to the supply of goods and did not include the supply of services. It was common ground between the parties that the digital editions constituted a supply of services – therefore the digital editions could not be “newspapers” within Item 2.

The UT disagreed with the FTT’s conclusion that, on its proper construction, Group 3 was intended to be limited to items that were goods, as opposed to services. The most that could be said was that each of the Items in Group 3 existed in 1972 in a physical form and thus satisfied the legal test for “goods”. That was not sufficient, in the UT’s view, to lead to the conclusion that it was the legislative intent to exclude services from Group 3. The fact that section 30 of the VAT Act 1994 authorised zero-rating for the various goods and services that were identified in Schedule 8 demonstrated that it was not whether a particular item qualified as “goods” or “services” that mattered. It argued that it was the purpose they fulfilled for customers that was relevant.

The FTT had also held that the “always speaking” doctrine of statutory construction (i.e. a construction which takes account of relevant changes which have occurred since the original enactment but does not alter the meaning of the wording) also precluded digital publications from qualifying within Item 2. However, the UT decision set out that the invention of a digital form of newspaper was precisely the type of technological development that the “always speaking” doctrine was intended to address. It said that treating digital newspapers as zero-rated did not extend the scope of Item 2 as both digital and printed newspapers fulfilled essentially the same purpose for their customers.

Jurisdictional issues

HMRC had argued that News Corp’s case was inconsistent with EU law and that Articles 98 and 110 of the Principal VAT Directive applied, but the UT held that they were not relevant. Similarly, it held that the fact that Council Directive (EU) 2018/1713 of 6 November 2018 specifically allowed Member States to zero-rate newspapers when supplied electronically did not automatically mean that a digital newspaper could not have been zero-rated before that date (under the “always speaking” doctrine).

Qualifying digital publications

The ruling could affect a variety of online publications: zero-rating potentially applies to any digital book, journal, periodical, newspaper, etc. where the printed equivalent would be zero-rated. However, in order for digital publications to qualify for zero-rating following this ruling, they must have a number of characteristics in common with print versions – ie they:

  • Must be edition-based publications (not ‘rolling news’)
  • The content must be fundamentally the same or very similar,
  • Any updates to the digital versions must be relatively minor,
  • Any additional content not be provided in newsprint must be a relatively minor aspect of the digital editions.

It does also raise questions as to whether the case should be interpreted more widely.

Action now required

Although this case may run on for some time, the UT ruling states that digital newspapers can ‘always’ have qualified for zero-rating. Therefore, where a publication is thought to qualify, providers may be able to make VAT refund claims dating back the standard four year period. Businesses should review their digital publications and, where possible, prepare a protective claim –the sooner a claim is made the better. Of course, HMRC will apply the usual ‘unjust enrichment’ rule to any claim, and is also unlikely to pay out on claims until any appeal is resolved.

However, organisations that have bought digital services but have not fully recovered the related VAT may now wish to try to reclaim that VAT from suppliers. So providers that do not make a claim to HMRC may face additional costs or unhappy customers as a result of this ruling.

For help and advice on the VAT treatment of publications please get in touch with your usual BDO contact or Glyn Woodhouse.

Addendum added 24 February 2020

HMRC has now released a business brief putting forward its view that electronic publications remain subject to VAT and confirming that it has been granted leave to appeal the Upper Tribunal’s decision to the Court of Appeal. HMRC has also confirmed that if a business believes that their supplies should be zero rated following the Upper Tribunal’s decision, that they are at liberty to make a claim. HMRC will then reject the claim and give the business an appealable decision that can itself be the subject of an appropriate appeal. Businesses should, therefore, consider whether to make a claim and then appeal HMRC’s rejection. When this has been done, the business could seek to stand over the appeal, awaiting the final decision in NewsCorp. This would then protect their position in light of the four year cap.