VAT liability of electronic editions of newspapers and e-books
The Upper Tribunal (UT) has upheld the appeal of News Corp UK & Ireland Limited (News UK) and disagreed with the First Tier Tribunal (FTT) decision that digital versions of its newspapers (including The Times, The Sunday Times, The Sun and The Sun on Sunday) were standard rated supplies for VAT purposes. The decision, published on 24 January 2019, concluded that electronic editions of newspapers are zero-rated for VAT purposes.
This case will be of interest to charities and membership organisations supplying printed matter (magazines, journals, periodicals, newsletters etc) to their members or supporters but which would prefer to do so digitally for environmental and economic reasons. The decision could also have implications for organisations already providing members or supporters with electronic publications (such as magazines).
Background to case and decision
News UK is the representative member of a VAT group registration that publishes newspapers. Print editions of these newspapers are also available electronically (e‑reader, tablet, website and smartphone editions).
HMRC’s current policy is that supplies of electronic editions of newspapers, books etc. are subject to VAT at the standard rate.
HMRC’s opinion (expressed in VAT Notice 701/10, published on 13 December 2016), is “the supply of text by electronic transmission (including e-books), via the internet, or similar means is also standard-rated. Such supplies are of services, not of goods, and different VAT rules will apply to them.”
HMRC’s position is that zero-rating under the legislative heading ‘Books etc’ (referring to books, booklets, brochures, pamphlets, leaflets, newspapers, journals and periodicals) is limited to supplies of goods (items to be held in the hand and read) as opposed to supplies of electronically delivered services which are standard-rated.
The FTT dismissed News UK’s appeal, finding in March 2018 that although the content of newspapers supplied as printed matter and digitally was ‘very similar’, zero-rating was only available to supplies of goods, although section 30 VATA contemplates zero-rating applying to supplies of goods or services.
The UT in the News UK case disagreed with the FTT’s conclusion that the zero-rate for books was intended to be limited to items that were goods, as opposed to services. VAT was introduced in the UK with effect from 1 April 1973. Some feel that VAT law has not kept pace with technological developments and advances. This is due to the provisions of EU law in allowing zero-rating in the UK do not allow the legislation for zero-rating to be altered. The UT acknowledged this point; however, it found that UK VAT legislation as drafted does not support HMRC’s view that newspapers must be physical goods. Digital versions of newspapers also qualify for zero-rating.
Potential impact for charities
Although this case only considered electronic editions of newspapers the findings of the Upper Tribunal support the argument for zero-rating other electronic publications.
Many charities are membership organisations. In return for payment of their subscription members or supporters will often receive a regular magazine. A number of VAT registered charities have agreed with HMRC to use Extra Statutory Concession (ESC) 3.35. This allows charities that supply various benefits to their members, with different VAT liabilities, to apportion the VAT liability of the subscriptions to reflect the VAT liability and value of those individual benefits.
Where members of a charity receive a magazine, and the charity applies ESC 3.35, this is usually a zero-rated supply. Zero-rating is beneficial when considering the recovery of VAT incurred. Many charities may like to forward digital copies of their magazines to members but could have been put off by doing so because of HMRC’s stance. A standard-rated supply would result in output VAT becoming due on subscription income (in full or in part) if journals are delivered electronically.
In theory, the UT decision that electronic editions of newspapers are zero-rated for VAT purposes is binding. We would recommend the impact of this decision is considered carefully by those charities and businesses supplying electronic publications, publishers of digital magazines and their clients for example. At this stage we do not know how HMRC will react to the Commissioners defeat at the UT. It is possible that an appeal to the Court of Appeal will be lodged. HMRC may issue guidance following this decision; however, a general reduction in the number of Business Briefs or Information Sheets released suggests that this will not be the case.
Claims for over-declared output VAT may be appropriate. This decision may also impact some input VAT recovery methods and claims for additional input VAT may also be possible.
In view of the 4-year cap currently in place for making amendments to VAT returns submitted, charities would be advised to deal with the matter proactively. It may be that suppliers have incorrectly charged VAT and these sums can be reclaimed from them, although the supplier will only be able to reclaim VAT charged in error from HMRC for the last 4 years. If a supplier has charged a charity VAT in error for longer than 4 years it may be required to refund VAT it is unable to reclaim from HMRC due to capping rules. Clearly, there are some complexities around this and where suppliers have behaved as instructed by HMRC. This is where commentary from HMRC would be helpful, where suppliers have relied on HMRC’s published guidance.
Similarly, if charities have declared output VAT on electronic supplies of publications any VAT accounted for in error will only be reclaimable from HMRC for the last 4 years. Any VAT refund claim submitted to HMRC is likely to be subject to the unjust enrichment provisions.
The decision of the UT may now mean that charities can issue magazines to members electronically and still retain zero-rating which is likely to lead to environmental and economic benefits. This may also present an opportunity for charities which are not VAT registered (the value of taxable supplies is currently below the compulsory VAT registration threshold of £85k) to VAT register on a voluntary basis if it delivers electronic publications to members. If VAT registration was avoided because of a potential output VAT liability a voluntary VAT registration may be more attractive if zero-rated supplies are made.
A final point worth noting is that on 2 October 2018 the European Council of the European Union agreed a proposal allowing member states to align the VAT rules for electronic and physical publications. This has not yet been implemented into UK legislation. The EU law does not have direct effect in the UK as the EU legislation does not oblige member states to treat electronic publications as subject to VAT at a reduced or zero-rate. This decision gives HMRC an opportunity to take steps to introduce changes beneficial to the environment and the sector.
Should you wish to discuss this case or any other VAT matters please do not hesitate to get in touch with your usual Constable VAT contact. A link to the UT decision can be found here.
Constable VAT Consultancy LLP is a specialist independent VAT practice with offices in London and East Anglia. We work together with many charities and not-for-profit bodies ranging from national charities, those working overseas, and regionally based local organisations. Constable VAT has a nationwide client base.
We understand that charities wish to achieve their objectives whilst satisfying the legal requirements placed upon them. Charities may be liable to account for VAT on supplies made and VAT will be payable on certain expenditure. As irrecoverable VAT represents an absolute cost to most charities, regardless of their VAT registration status, there is a need to review the position regularly and carefully. We offer advice with planning initiatives, technical compliance issues, complex transactions, help with innovative ideas on VAT saving opportunities, and liaising with HMRC.
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