The VAT Act is "Always Speaking"

23 January 2020

The world has changed considerably since VAT was first brought into the UK in 1973, nowhere more so than in the world of digital media.  When the zero rating for newspapers was being drafted, the idea of digital publications was never considered.  This means that, in many areas of the tax, we have products and solutions which were not written into the legislation. 

In the recent Upper Tribunal (UT) VAT case of ‘News Corp UK & Ireland Limited’, the digital versions of hard copy newspapers such as The Times and The Sun were the focus of attention. 

The taxpayer argued that these digital versions were still ‘newspapers’ and were therefore zero rated under VATA 1994 Schedule 8 Group 3 Item 2 as ‘Newspapers, journals and periodicals’. 

HMRC was successful in the First Tier Tribunal (FTT); arguing that zero-rating only applied to the physical goods and that zero rating could not be afforded to electronic publications.    

Two contrasting principles were considered by the UT: “Standstill” and “Always speaking”. 

With the “Standstill” argument, Article 110 of Council Directive 2006/112/EC provides that member states could continue to zero rate items that were zero rated on 1 January 1991.  Consequently, if a product was not zero rated in 1991, it could not benefit from the zero rating now. 

Conversely, the “Always speaking” doctrine holds that “it is presumed the Parliament intends the court to apply to an ongoing Act a construction that continuously updates its wording to allow for changes since the Act was originally framed”. In effect, that the law moves with the times.     

In favouring the “always speaking” doctrine, the UT made the decision that while it might be correct to observe that treating digital versions of newspapers as zero-rated would result in an item being zero-rated under UK domestic law that was not zero-rated in 1991; this is solely because ‘that item did not exist in 1991 and the item is properly to be characterised as within the genus of things that the pre-1991 legislation did exempt’. 

Importantly, as this is an UT decision, it creates legal precedent.  As a result, taxpayers who have been accounting for VAT on digital publications at the standard rate will have the opportunity to submit a claim for overpaid output tax.  We expect that HMRC will appeal against this decision and so the matter is unlikely to be concluded in the near future.   

Due to the four-year statutory limit on adjusting VAT claims and the length of time that may be taken if HMRC are to appeal the decision, our recommendation is that a protective claim is submitted to HMRC as soon as possible in order to protect any over-paid VAT going “out of time”. 

Similarly, for recipients of digital publications, they should approach their suppliers to seek refund of VAT that has been incorrectly charged. 

For some claims, HMRC may argue that “unjust enrichment” applies such that the claim is invalid because it was the ultimate consumer that incurred the overcharged VAT.  In many cases this defence will be able to be rebutted as it is likely that a single subscription price was charged for the publication without reference to VAT. 

Until the dispute is finally resolved and/or HMRC issues updated guidance, we would recommend that taxpayers continue to account for VAT on digital publications and regularly submit further protective claims. 

The News Corp decision considered the difference between physical and digital newspapers.  However, there are other products that are the modern equivalent of items that were zero rated in 1991.  Can taxpayers challenge HMRC’s “standstill” position and apply the same “always speaking” doctrine to other supplies? 

If you would like to discuss how the News Corp decision will affect you, or if you require assistance in preparing a claim either to HMRC or to your supplier, please get in touch with Alistair Duncan (alistair.duncan@aab.uk) or your usual AAB contact. 

 

By Alistair Duncan, Director and Head of Indirect Tax Practice at Anderson Anderson & Brown LLP.

For more information on Alistair and the Indirect Tax Practice Team, click here. 

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