If you’re a digital publisher in the UK, are you on the right side of the law when its comes to VAT?

The UK state effectively subsidises printed newspapers and magazines by making them “zero-rated” goods, so no VAT is payable. However publishers are forced to impose the full 20 percent charge on digital goods – even if they’re bundled into print-and-digital subscription deals.

This is not an insignificant issue. A study from the Reuters Institute for the Study of Journalism at Oxford University found that in 2008 the amount of tax the press avoided through VAT-dodging was £594 million. What would happen if the government had a change of heart on this rule?

The rules

In fact, this is all very simple. Printed newspapers and magazines are zero rated under HMRC’s VAT Notice 701/10, meaning they incur no VAT charge. VAT is an EU-enforced taxation that can be tweaked by EU member states (to no lower than 15 percent). Some items, such as electric heaters, are charged at the lower rate of 5 percent while others, like lottery tickets, are exempt entirely.

The full list of zero-rated items is: “Books, children’s painting and picture books, maps and charts, magazines, newspapers, printed or copied music, publications”. Digital goods are not listed anywhere in that list and must be charged at the standard 20 percent rate.

Bundling investigations

But what if you are selling something digital and something physical at the same times? For example, a newspaper subscription that provides both a printed newspaper and .com and app access?

The uncomfortable answer is that the digital goods must be split out of that deal and charged at the full rate. The digital portion of the deal incurs a VAT charge wherever the publisher’s subscription fulfilment company is based. Whether that cost is passed along to the consumer is up to the publisher, but it’s unavoidable.

I have heard several rumours in the past weeks that some publishers are being investigated by the tax man for not quite being on the right side of this law. While HMRC didn’t confirm or deny this when I asked if there had been such investigations, the officer did make a point of reminding me that they certainly have powers to investigate any rule-breaking and that the government has just invested £917 million into stamping out tax avoidance.

Alex Watson, head of app development at Dennis Publishing, has grappled with this problem head on and he highlights to me just what a problem for the modern publisher this can be.

He explains: “For instance, on a £1.49 copy of an app, we receive 91p – 41 percent of the price, because we’re paying Apple’s 30 percent cut, and the VAT (which, I think is Luxembourg VAT). The iTunes store is the retailer, and they therefore need to collect VAT. When we sell a digital-only subscription via iTunes, similarly, we lose both Apple’s cut and the VAT.”

And what about bundling? As Watson admits, it gets a bit complicated: “It is our understanding, based on conversations with our accountants and HMRC, that if you don’t define the portion of the sub that is digital – ie do something in terms of messaging and product positioning which clearly sets a value for it – then the entire sub is liable for VAT.

“Allowing print users free access to a digital copy means there is no value explicitly attached to the digital portion, so we have been told HMRC will therefore see the whole subs fee as liable for VAT.”

For how much longer?

That’s clear enough, but why newspapers and magazines are zero-rated in the first place is far less clear. The democratic importance of a free press is undeniable, but as print sales decline and generational attitudes towards news consumption irrevocably change, there must come a point when this rule is seriously challenged and ultimately overhauled.

Note that newspapers and magazines are not exempt from VAT – they are zero-rated, meaning they are entirely eligible for the charge but thanks to the mercy of the government do not face it. It would be very easy for George Osborne in his next Budget to increase the zero-rated VAT charge for newspapers and magazines to 5 percent or even the full 20 percent.

The industry won’t like it, but as reading habits change, exactly how are magazines and newspapers reaching new audiences and fulfilling their role in a democracy?

Image from 401k on Flickr via a Creative Commons licence.