VAT: Digital newspapers are not zero rated
The FTT decided that VAT is payable at 20% on subscriptions paid to read online editions of newspapers, because zero-rating only applies to the newsprint editions.
It is a well-known fact that when you buy a newspaper, the price you pay will be zero-rated for VAT purposes. This situation has applied since the nation’s favourite tax was introduced to the UK on 1 April 1973.
I do wonder whether the legislation back in the 1970s would have extended the zero-rating to digital versions of newspapers, had they existed at the time. In other words, the tablet, website and smartphone editions of the newspaper that readers usually pay a subscription for on a monthly basis.
After all, the reason for the original zero-rating was linked to the social policy of increasing literacy in the country, so surely it is fair to allow zero-rating for all the different mediums now available? That was the taxpayer’s argument in the FTT case of News Corp UK and Ireland Ltd (TC06385).
The judge spent a lot of time reaching the conclusion that the editorial content of newsprint and digital versions of The Times, Sunday Times, The Sun and Sun on Sunday was largely the same. Reader behaviour seemed to be the same in both cases, ie proceeding through both versions in a logical fashion on a page by page basis.
HMRC’s view is that zero-rating only applies to newsprint versions and that all other formats are excluded from Item 2, Group 3, Sch 8, VATA 1994 and are therefore standard rated. The taxpayer’s view was that “legislation, once enacted, had to be kept up-to-date with, inter alia, technological advances” The phrase used was that the legislation should be “always speaking.”
The key fact that went against the taxpayer was that Group 3 only zero-rates the supply of ‘goods’ and not ‘services’. The digital versions offered by the taxpayer were clearly supplies of ‘electronic services’ and not ‘goods.’ To be classed as goods, the item being sold must be tangible, which is clearly not the case for the non-paper versions of the newspapers. To quote from the tribunal report:
“In my view, to extend Item 2 Group 3 beyond the supply of goods (newsprint newspapers) to cover the supply of services (digital newspapers) would be an impermissible expansion of the zero rating provisions. It is clear that the provisions of Item 2 Group 3 should be construed strictly and that this therefore, in my view, prohibits the application of the ‘always speaking’ doctrine to extend the scope of zero rating to apply to digital editions of the titles.”
There was a separate issue about whether it was unfair for VAT to be charged on digital versions, but not on printed editions. Did this breach the principle of fiscal neutrality, which is an important part of EU law?
The aim of fiscal neutrality is to prevent distortion of competition between different suppliers, where the same supply is being made but with a different VAT outcome. This argument was also dismissed by the court, which concluded that “the digital editions of the titles, which constitute a supply of services, are simply not within the zero rating provisions and the scope of those provisions cannot be enlarged by the application of a principle of interpretation, such as that of fiscal neutrality.”
The verdict was not good news for online publishers. The decision also impacts on any printed publication that is also offered as a digital option, eg magazines, newsletters, technical publications. A victory for the taxpayer would also have raised the question as to whether digital music should be zero-rated in the same way as sheet music supplied on manuscript.
HMRC will be very relieved to win this case, although the argument about the need for legislation to be “always speaking” as technology advances certainly has some merit. Perhaps this issue will be considered again when the UK leaves the EU.