Briefing paper: E-books – What's all the
fuss about?
If the amount of commentary and column inches dedicated to the subject are anything to go
by, not since the great Jaffa-Cake debate has one VAT issue polarised opinion so much. With
the advent of the 'Kindle' and other similar devices over the last five years or so, sales of the ebook (electronic or digital book) has 'grown like Topsy'.
What's the issue?
From a VAT perspective, the e-book is a difficult
phenomenon. On the one hand, it is clearly not a physical book
but, on the other, the user can read the latest blockbuster (or
even a classic like Uncle Tom's Cabin) in [almost] exactly the
same way. From a fiscal viewpoint, one is a supply of goods yet
the other is a supply of services and – according to the
European Commission – each should be treated differently for
VAT purposes.
The problem is that, since 2012, both France and
Luxembourg have applied a lower rate of VAT to the supply of
e-books. Because the VAT rules governing such supplies
currently say that VAT is due in the country where the supplier
belongs, suppliers based in France and Luxembourg have been
able to sell e-books at the reduced rate (France 5.5% and
Luxembourg 3%). This has peeved competitors based
elsewhere in the EU who complain that the application of
reduced rates by suppliers such as Amazon who are based in
Luxembourg has distorted competition such that the much
sought after level playing field is, in essence, a pipe dream.
Complaints have been made that because of the application
of the lower rates, suppliers in France and Luxembourg have, in
effect, distorted competition. Such matters do not escape the
notice of the European Commission which, in November 2013
has finally taken action against France and Luxembourg by
referring both Member States to the Court of Justice of the
European Union for what it considers to be a clear breach of
their respective obligations under the VAT Directive.
In its action, the Commission has asked the CJEU to give a
preliminary ruling on the VAT treatment of e-books and, in
due course, the matter should be finally resolved. However, it is
likely to take the CJEU at least a year (if not longer) to come to
a final decision. Meanwhile, suppliers of e-books based in other
Member States will continue to suffer from the alleged breach
of the Directive by suppliers based in France and Luxembourg.
Even if the Court finally decides that the two Member States
have indeed breached the rules, suppliers based there will have
reaped the benefit of almost three years of profits from an anticompetitive and illegal application of a tax rate. Unless the
Court of Justice also takes the unusual step of requiring French
and Luxembourg based suppliers to somehow pay
compensation to competing suppliers, any victory is likely to be
hollow. A pyrrhic victory is no victory.
On 1 January 2015, none of this will matter anyway. The
rules governing the place of supply of electronically supplied
services (including e-books) will change dramatically. From that
date, the place of supply of business to consumer (B2C)
supplies will change from the place where the supplier belongs
to the place where the customer belongs. So, suppliers based in
Luxembourg and France will no longer have the advantage of
supplying e-books at a reduced rate just because that is where
the supplier is established (although supplies to consumers in
Luxembourg and France would continue to receive the e-books
at the rates in force in those countries). From 1 January 2015,
they, like all other suppliers within the EU will have to account
for VAT at the rate in force in the country where the customer
is established. This, in itself, is a massive change to the VAT
rules which all e-tailers need to get to grips with but, it will be
somewhat ironic if the CJEU's ruling is announced at or around
the exact time when the playing field has, in any case, been
levelled through natural progression as it were. Cynically,
perhaps both France and Luxembourg cunningly took the view
that it would probably take until 2015 to resolve the arguments.
In the meantime, far better to keep their home-based suppliers
in a position where they can effectively dominate the market
while, at the same time, increase the respective exchequers' tax
take.
History
As far as the UK is concerned, when VAT was first introduced
in 1973, it was permitted to zero-rate certain supplies where the
zero-rating was desirable to meet a defined social purpose and
for the benefit of the final consumer. At the time, it was
considered that the supply of information by way of written
works such as newspapers and books should not be taxed. The
UK has, thus applied the zero-rate to supplies of such things as
books, booklets, newspapers, journals and periodicals.
When the VAT law was written back in the 1970s the
concept of electronic books had not even been contemplated.
No surprise then that the law does not cater for them. With the
advent of e-readers such as Kindle and iPAD, it is only in more
recent times that the gap in the law has been noticed. There has
been much lobbying to get e-books treated the same as physical
books for VAT purposes.
Fiscal neutrality
In simple terms, the arguments put forward by the various
lobby groups relate, in the main, to the principle of fiscal
neutrality which states that the same or similar supplies that are
in competition with each other should not be treated differently
for VAT purposes. The questions here are, therefore, whether
1) e-books and physical books are the same or similar products
and 2) if they are the same, are they, in fact, in competition with
each other. If the answer to both of those questions is yes, then
treating them differently for VAT purposes is likely to breach
the principle of fiscal neutrality.
Q1 – Are they the same or similar products? – on the face of
it, it could be argued that they are. A downloaded book for
example is read by the reader from a page (albeit a digital page),
the reader can place a digital bookmark and can skip pages etc.
Exactly the same as for a physical book. However, as the ebook experience grows, the similarity between the e-book and
the physical book diminishes. In the latest iteration of the ebook, in addition to the basic functions, there are now search
functions, hypertext links which link the reader to other
content on the Internet, interactive features such as video and
animation etc. None of these features are available with a
physical book and so, it could be argued that they are not the
same or similar products.
Q2 – Are they in competition with each other – This is not
an easy one to answer. Counsel advised Grant Thornton (in an
opinion we obtained in 2011) that for goods to be in
competition with each other, it was the VAT treatment of the
goods in question that had to be the driver in the eyes of the
consumer. In other words, it was not a question of the physical
characteristics of the goods or the demand for them
determining whether they were in competition with each other
but whether the customer was driven to one or the other
because of the different tax treatment. Counsel considered
when he provided his opinion that, in his view, a Court would
more than likely find that customers choosing between an ebook and a physical book were not driven by the different tax
treatment of the two but by other issues. As such, Counsel
considered that the principle of fiscal neutrality was not
breached.
Following the Court of Justice judgment in Rank Group
PLC, to some extent, Counsel's opinion is now out of date. The
judgment in Rank suggests that the old test of whether goods
or services are in competition with each other is no longer
required and that, what matters, is whether the products are the
same or similar from the point of view of the customer. One
suspects that, from a layman's point of view, an e-book is the
same or similar to a physical book. It can be argued that the
consumer's experience [of reading a book] is the same whether
or not the e-book has the additional bells and whistles.
not mention the supply of digital books as being capable of
being subject to a reduced rate of VAT. The Commission infers
from that that the supply of electronic books must therefore be
subject to the normal rate of VAT. That is also confirmed,
according to the Commission, by the second subparagraph of
Article 98(2), which explicitly excludes electronically supplied
services from the benefit of reduced rates of VAT. In other
words, the law specifically states that reduced rates cannot
apply.
Finally, in support of its action against both France and
Luxembourg, the Commission claims that, although not legally
binding, the EU VAT Committee unanimously adopted, on 9
February 2011, guidelines according to which reduced rates of
VAT do not apply to the supply of digital books.
How will the Court of Justice rule
Given the wording of the second sub-paragraph of Article
98(2) of the Directive, it is very difficult to see how the Court
could possibly come to any other conclusion that the reduced
rates cannot be applied to electronically supplied services. To
do otherwise would be to fly in the face of what can only be
described as clear and unambiguous wording.
It is, of course, possible that the Court may accept the fiscal
neutrality point. However, given the power of the wording of
Article 98(2) this would be something of a surprise.
What should businesses do in the meantime?
Although, in our view, a long shot, while any possibility that the
Court could rule against the Commission exists, affected
businesses may wish to reserve their position by the submission
of a speculative claim. Clearly, affected business could lodge a
section 80 claim for VAT overpaid on supplies of e-books and
other similar services and such a claim could be retrospective
covering the four years prior to the claim being made.
Depending on the exact contractual and commercial
arrangements that are in place, businesses may not, in fact, act
as principal when e-books are sold and, if that is the case, they
would not, therefore, be entitled to make a direct claim.
However, in such circumstances, it may be possible to negotiate
a deal with the principal such that any VAT refund paid to the
principal could either be passed on or shared.
Businesses wishing to pursue either route should be made
aware that a claim is probably highly speculative and will take at
least 12 months or so to settle. Any claim is, with almost
certainty, likely to be rejected and, as such, the business will
then need to lodge an appeal to the First-tier Tribunal seeking a
stand-over application until the outcome of the French and
Luxembourg infraction proceedings is known.
Further information
The Commission's case
For further information in relation to this or any other topic
please contact your local Grant Thornton VAT Specialist
On the face of it, the Commission has a strong legal case. In
particular, the Commission states that Article 98(2) of the VAT
directive, reduced rates of VAT may be applied only to the
supplies of goods and services referred to in Annex III to that
directive. Category 6 of Annex III to the VAT directive does
Karen Robb
VAT Partner
T 020 7728 2556
E karen.robb@uk.gt.com
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