The VAT treatment of non-physical books continues to give rise to political and legal issues, with the European Court of Justice (ECJ) recently giving its judgment in the Finnish K Oy case, which concerns the VAT treatment of books on CD-Rom and other digital storage devices, such as memory sticks.
In its decision, the ECJ made it clear that if a typical consumer in a particular EU member state treats such products in a similar fashion to a physical book, then that member state must apply the same VAT rate to both items.
Andrew Loan, senior consultant at Macfarlanes said he was not surprised by the ECJ’s decision.
“Most people expected that the court would take a restrictive approach to VAT on books. It wasn’t a surprise that they wouldn’t extend the zero-rate,” said Loan.
However, when asked how the Court’s decision may affect the treatment of digital books in the UK, where physical books are afforded a zero-rate, he felt the impact of the case would be minimal.
“My suspicion is that the UK will adopt a conservative approach and say that, unless there is convincing argument that e-books can be considered the same as paper-books then they won’t get the zero-rate,” he added.
It is important to note that the Finnish K Oy case relates to VAT treatment of digital e-books on CD-Roms and other digital storage devices, so it is important to look at the Court’s decision within this specific context
The case did not deal with e-books exclusively, rather the method of delivery, which are data files typically downloaded from the internet and the EU VAT Directive makes it clear that e-books are liable to VAT at the standard rate, which explains why HMRC have said that the ECJ decision “has no impact on supplies in the UK”.
The case specifically addressed whether member states could distinguish between printed books and books on other physical media such as CDs, DVDs and memory sticks for the purposes of applying a reduced rate of VAT.
“I think it is definitely a positive development for businesses that have been questioning the validity of the differential VAT treatment accorded to printed material (zero-rated) versus digitally published material (standard-rated),” said Richard Vitou of Deloitte. “To date, UK HMRC have been very clear on their views that they cannot apply the zero-rate to electronically published material. The main rationale for this position seems to stem from the legal basis for the UK zero-rate, which under EU standstill provisions cannot be extended.”
“The counter-view is that the application of the zero rate to digitally published material is not about extending the scope, but applying a modern day interpretation of what the zero-rate should apply to. Since the zero-rate applies to journals, periodicals, magazines, newspapers and books, should it not also apply to a digitally published book or digital newspaper?”
“Up until this decision HMRC have been resistant to that kind of analysis, but it remains to be seen if the K Oy decision will cause HMRC to revisit their thinking, “added Vitou.
The European Commission has referred cases against France and Luxembourg for applying a reduced VAT rate on e-books in October 2012. The issue of differing rates will changes once the EU VAT changes take effect in 2015. The changes will see the destination principle applied, shifting the place of supply for VAT purposes on digital products such as ebooks to where the product is consumed.
“The [ECJ] judgment is very clear on the issue of the VAT treatment of non-physical books,” said Alan Sinyor, head of VAT at international law firm Berwin Leighton Paisner. “If a typical customer in the UK views an e-book as similar to a physical book, then the VAT treatment must be aligned.”
“HMRC will not like this, but when it comes to VAT, the CJEU’s views must carry the day. In the case we are currently taking to the Tribunal, we will be arguing robustly that HMRC must accept the [ECJ’s] position on this point,” said Sinyor. “At a time when all parties are focussing on the cost of living and voters, this will be particularly important in the light of the change in VAT rules on January 1 2015, which will see the UK’s 20% VAT rate applied to all UK customers, even if the supplier is based elsewhere.”
