Update - HMRC has now published Revenue and Customs Brief 6 (2023) which summarises the Supreme Court's decision discussed below. HMRC note that they are now in the process of writing to taxpayers standing behind the NewsCorp litigation (and we have seen this in practice).
What was the dispute about?
Under the UK VAT rules, newspapers are zero-rated for VAT purposes. This means that readers pay no VAT on the price of a newspaper, but those publishing the newspaper can recover VAT that they pay on costs incurred as part of the publication process.
News Corp, which publishes The Times, The Sunday Times, The Sun and The Sun on Sunday, argued that digital editions of its newspapers were "newspapers" for the purposes of VAT legislation, and HMRC disagreed.
Whilst the decision is a significant one for the sector (and more generally the application of the UK's VAT regime to technological advances), the specific issue in the case is of historical relevance, as from 1 May 2020, the VAT rules were amended so that zero-rating would apply to digital publications after that date. The Supreme Court's reasoning is however of continued relevance and significance in a number of VAT contexts.
What did the Supreme Court decide?
The Supreme Court agreed with HMRC that the VAT zero rating applicable to "newspapers" prior to 1 May 2020 did not include digital editions of newspapers.
The Supreme Court considered the "always speaking" principle of statutory interpretation which suggests legislation should be interpreted to "read in" or take account of social, technological and scientific advances.
However, the Supreme Court concluded that it was not possible to use the always speaking principle to read "newspapers" as also referring to digital editions of newspapers. The Supreme Court's reasoning can be summarised as follows:
- The UK's VAT regime derives from European Union ("EU") law, and it is well established that any VAT zero-rating provisions must be interpreted strictly.
- The need for strict interpretation is even more prominent where, as here, the zero-rating does not strictly derive from the EU, but a UK derogation from EU rules.
- The relevant UK derogation from EU rules from which the VAT zero rating for newspapers (and certain other publications) derived originated in the 1970s and the EU Principal VAT Directive required such derogations not to be extended beyond those which existed on 31 December 1975.
- The strict interpretation required for VAT zero-ratings provisions, combined with the origin of the specific VAT zero rating provision at issue meant that the meaning of "newspapers" needed to be considered in light of the meaning of "newspapers" in the 1970s (when digital editions of newspapers would not have been conceived of).
- There were notably differences between "newspapers" in the 1970s and digital editions of newspapers, including that digital editions of newspapers could only be read by means of a separate device.
The Supreme Court considered that these conclusions meant that the Supreme Court could not apply a liberal interpretation to "newspapers" to include digital editions of newspapers. Accordingly, the Supreme Court did not permit News Corp to recover the VAT it sought.
Why does it matter?
There were a number of cases that "stood behind" News Corp's VAT appeal. The Supreme Court's decision will affect these and other taxpayers directly. However, as already mentioned, this is a somewhat historic problem, because the VAT rules were amended so that from 1 May 2020, digital editions of newspapers also benefit from zero-rating.
It is the Supreme Court's assessment of the UK's VAT regime which is more long-lasting. The Supreme Court's decision confirms that the current VAT system has inbuilt constraints so that the interpretation of certain rules (including the VAT zero rating rules and likely VAT exemption rules) may require detailed consideration of the origins of those rules and the historic context in which they were introduced.
As VAT zero-rating applies to a wide range of goods and services in many sectors of the UK economy, including certain food items, books and other publications, medication and children's clothing, the Supreme Court's decision has a potentially wide application.
Issues with VAT can have a significant impact on the cash-flow and operation of a business. This case is a timely reminder that businesses must carefully consider the correct VAT treatment when launching a new product or service line, and may wish to revisit VAT treatment of existing products or services, particularly where there is some uncertainty.
