With effect from Friday 1 May 2020, the VAT treatment of electronic books and other digital publications (subject to some exclusions) became zero-rated. These changes were initially planned for 1 December 2020, but HMRC brought forward the changes as a result of the COVID-19 pandemic, to reduce the cost of access to online publications while people live under lockdown conditions.
What do these changes mean?
First and foremost, if you supply electronic publications, the VAT rate on those supplies needs to be amended to 0% with immediate effect and retrospectively from 1 May 2020.
The new zero-rating rules will apply to sales of e-books, e-booklets, e-brochures, e-pamphlets, e-leaflets, e-newspapers, e-journals, e-magazines and e-periodicals, as well as electronic versions of children’s picture and painting books. However, audiobooks and any e-publication with more than 50% of its content allocated to advertising, audio and/or video content, are excluded and will continue to be standard rated (20%).
What if I supply e-books with something else?
HMRC has published guidance when a zero-rated publication is supplied together with something else:
1. A business makes a single supply of an e-publication it is zero-rated but only if it is the principal element and anything supplied with it is ancillary. This means that:
a. there is a single price for the products/ package;
b. the supply is advertised as a package;
c. the other assets cannot be purchased independently without the e-publication;
d. the other products would be useless without the e-publication and are merely supplementary; and,
e. your customers view the sale as a single supply of an e-publication and the additional products are simply extras.
For VAT purposes, if the other products are deemed to be ancillary to the e-publication, the zero VAT rate is applied to the whole supply.
2. A business makes multiple supplies where the various elements of the supply are distinct and independent, i.e. the items have the following characteristics:
- they are sold subject to separate pricing or invoicing;
- the items are available for purchase separately and not as a package;
- there is a time differential between parts of the supply; and/or,
- elements of the supply are not inter-dependent or connected.
Consequently, only the e-publication is zero-rated, and the standard 20% VAT rate or VAT exemption applies to the other supplies, as appropriate.
Do I have to reduce my prices?
HMRC changed the rules to allow customers to benefit from lower prices. However, a case by a newspaper group had first brought this matter to the Tax Tribunal in 2018, arguing that its digital editions were ‘newspapers’ under the existing VAT regulations and thus, should be zero-rated, i.e., without any relaxation by HMRC. The case won at the Upper Tribunal which ruled that the content of The Times and The Sunday Times during the periods of September 2010 to June 2014, and 28 January 2013 to 4 December 2016 was ‘fundamentally the same or very similar’ as between the digital and printed editions.
If you consider that the decision by the Upper Tribunal applies to your supplies of digital publications, a claim can be made in writing to HMRC. You will also need to consider whether you reduce your prices for online digital content. Any claim made will be rejected by HMRC, and it is possible that a retrospective VAT refund could be disallowed if HMRC successfully argues that you will be “unjustly enriched” by such a VAT refund because the buyer rather than the seller suffered any overcharged VAT.
If you are a supplier of electronic publications and are unsure of what these changes mean, please contact Daphne Hemingway, VAT partner on the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.