HMRC case could see VAT on e-books axed

HMRC case could see VAT on e-books axed

Law firm Berwin Leighton Paisner believes that it could hand UK publishers and booksellers a significant advantage in the grab for e-book market share if it wins its case against HM Revenue & Customs on whether e-books should be free of VAT. The case is expected to be heard in mid-2013.

BLP is taking the case on behalf of an unnamed client (or clients) who have been charged VAT on e-books but not on printed books; if it wins, the client/s may be able to claim back VAT already levied. BLP intends to argue in court that the different rates of VAT for effectively the same reading material breach EU law on "fiscal neutrality", which require similar products to be treated in the same way for VAT purposes. The law firm will also contend that there is nothing in the VAT legislation that specifies that a "book" should be a physical form.

Alan Sinyor, head of VAT at BLP, said it was wrong to believe that the definition of the word "book" was fixed. "People may assume that these concepts are fixed for all time, but as VAT case law makes clear, they must be updated for changing technological circumstances."

Sinyor-the brother of Joe Sinyor, who ran the Dillons bookshop chain in the 1990s-said that the definition of the word "book" could, arguably, even be extended to include e-books that have video or other enhancements. "In our view, where it is just an ePub or PDF version, both of these should be zero-rated. Of course, there is a spectrum along which electronic books start to function less like a physical book and more like, for example, a database. That raises more difficult questions, but there are still arguments that could justify zero-rating."

HMRC has argued that if it is forced to equalise rates across both formats then it will be obliged to equalise upwards, since the UK government is not allowed to extend the scope of zero-rating. That would result, they have said, in charging VAT (probably at 5%) on physical books.

That threat has largely put off the book trade from pursuing the case. Though with the e-book market now much more significant, earlier this year the Publishers Association called for the abolition of VAT on e-books, and the Booksellers Association has also campaigned against the differential rates of VAT.

Sinyor said he thought the threat that the government would be forced to put VAT on physical books if BLP wins the case came from a weak argument. "The subtle but vital point is that the European Court of Justice has drawn a clear conceptual difference between: on the one hand extending the concept of a zero-rating category, which is indeed illegal; and on the other hand applying the existing concept to new products which properly fall within its scope. That second approach is not only permissible, but an obligation of HMRC; their threat effectively ignores this distinction."

The case is just one element in a flurry of activity around tax. The European Commission is consulting over VAT rates with an ambition that similar goods and services should be subject to the same VAT rate. But changes are not expected to be made until 2014 at the earliest.

Also, in 2015 the rate of VAT applied on e-books will move to the country of the purchaser rather than the seller, removing Amazon's current advantage. The EC is also poised to take Luxembourg and France to the European Court of Justice for unilaterally reducing the rate of VAT on e-books to their lowest rates. Ironically, if BPL wins its case, the UK would have the lowest rate of VAT on books and e-books in the EU-zero.