Supreme Court decides digital newspapers were not eligible for zero rating before 2020
3 March 2023| CATEGORIES: digital newspapers, Supreme Court, zero rate| TAGS: VAT News
The UK Supreme Court, in the case of News Corp UK & Ireland Ltd v Commissioners for His Majesty’s Revenue and Customs [2023] UKSC 7, has ruled that digital versions of newspapers were not entitled to the VAT zero rating for newspapers before the legislation was changed to include them from 1 May 2020.
Historic VAT treatment
Until May 2020, digital newspapers had been liable to VAT at the standard rate (currently 20%) as a supply of digital services, whereas printed newspapers are zero rated as they fall under “newspapers, journals and periodicals” which are specified as eligible for zero rating under Schedule 8, Group 3, item 2 (‘Item 2’) of the VAT Act 1994.
EU law allows Member States to continue to use reduced or zero VAT rates where Member States applied such rates at 1 January 1991 (Article 110 of the Principal VAT Directive). The “standstill provision” of article 110 says that, generally, zero rating categories cannot be extended beyond those which existed on 31 December 1975. Printed newspapers have been zero rated in the UK since the introduction of VAT in 1973, and so Article 110 clearly permits the UK to maintain this zero rating for printed newspapers. Digital newspapers, however, did not exist in 1991.
With effect from 1 May 2020, zero rating was extended to newspapers supplied electronically as long as they were not wholly or predominantly devoted to advertising or consisted wholly or predominantly of audio or video content.
First Tier Tribunal decision
News UK first brought its case against HMRC in 2018 in relation to its digital editions of The Times, The Sunday Times, The Sun and The Sun on Sunday publications, arguing that:
- they were ‘newspapers’ under Item 2 and should therefore be zero rated; and
- regardless of the above, the application of the principle of fiscal neutrality should apply i.e. the similarities between the print and digital versions of the newspapers from the consumers’ perspective required them to receive the same VAT treatment.
The First Tier Tribunal (FTT) ruled in favour of HMRC, concluding that the digital editions provided services rather than goods, and Item 2 related solely to goods. Furthermore, whilst there are similarities from the point of view of the consumer, the scope of the zero rating provisions cannot be extended by applying a principle of interpretation such as fiscal neutrality.
Upper Tribunal decision
News UK appealed the FTT’s decision.
The Upper Tribunal (UT) found that it is “an essential characteristic of a newspaper that it is produced in periodic editions”, with News UK’s occasionally updated digital editions meeting the definition, whilst a constantly updated rolling news service, such as the BBC News website, would not.
Under the “always speaking” doctrine, legislation is required to be read as though written for the present day, allowing it to keep pace with technological changes. The original legislation on zero rating had been written before the internet existed and the UT concluded that Item 2 was not limited to goods as the FTT had found, but rather the items were only available in a physical form at that time. Therefore, including digital versions of newspapers within the definition of “newspaper” would not constitute an extension to the scope of the zero rating provisions.
As the FTT had found that the digital versions of the newspapers were “fundamentally the same or very similar” to the printed editions, the UT concluded that News UK’s digital newspapers did fall within the category of newspapers and were therefore eligible for zero rating.
Court of Appeal decision
HMRC won its appeal to the Court of Appeal (Court) challenging the conclusions reached by the UT as wrong in law.
The Court agreed that:
- the UT misapplied the ‘always speaking’ principle of statutory interpretation and the principles of EU law that govern zero rating.
- during the relevant period, ‘newspapers’ within Item 2 Group 3 of Schedule 8 was limited to tangible goods and did not extend to cover ‘digital news services’. The extension adopted by the UT was impermissible and therefore contrary to both domestic and EU law.
- the requirement that zero rating provisions are strictly construed, and the effect of Article 110 as a ‘standstill’ provision, requires even greater care to avoid an extension of the zero rate regime.
Supreme Court decision
News UK appealed the Court of Appeal’s decision. However, the Supreme Court unanimously dismissed the appeal.
The Supreme Court reached the following conclusions in its judgement:
- With regard to the “always speaking principle”, it considered the starting point to be the ordinary meaning of the word “newspapers” in its context at 31 December 1975. At that time, newspapers referred only to printed copies because digital editions had not been envisaged. Newspapers were zero rated to promote literacy, the dissemination of knowledge and democratic accountability. The same purposes could be said of digital editions, but this could also apply to, for example, an online rolling news service.
- With regard to EU law, the Court noted that it is well established that zero rating provisions must be interpreted strictly, because they constitute exemptions to the general principle that supplies of goods and services by taxable persons should be subject to VAT. The need for strict interpretation is particularly marked where, as in this case, it does not involve mandated EU exemptions, but relates to national law exceptions.
- The standstill provision prevented social hardship arising from the abolition of existing national law exemptions. However, because digital editions did not exist when this was introduced, no social hardship could follow from their exclusion from this provision. Further, the zero rating of newspapers was supposed to be a transitional phase leading eventually to a harmonized EU-wide approach of no VAT exemptions at all.
- There was a conceptual difference between newspapers, which are goods, and digital editions, which are services. This was a difference of kind, not merely of degree, and thus it was not irrational to distinguish between their VAT treatment. Nor did the principle of fiscal neutrality, requiring similar goods and services be treated the same for VAT purposes, support the taxpayer’s case because it was not true that some forms of digital edition were zero rated while others were not.
Consequently, these factors meant that the meaning of “newspapers” in Item 2 should be interpreted narrowly as news communicated through the medium of print in a physical form. The appeal was therefore dismissed.
This is the last stage in the appeals process so the decision is final. It will be disappointing news for taxpayers that had submitted claims relating to the zero rating of digital newspapers or digital publications prior to May 2020 pending the outcome of the News UK litigation. It has been an interesting case to follow with different approaches and conflicting opinions arising throughout the judicial process.