Digital newspapers and VAT

A Council Directive of November 2018 purported to finally allow Member States to apply a reduced or zero VAT rate to digital books and newspapers. The recent Upper Tribunal decision in Newscorp, however, suggests that, in the UK, digital newspapers were zero-rated all along. 

Position before 2018

The received wisdom had been that, for VAT purposes, printed books and newspapers were fundamentally different from their digital equivalents. The former are goods (to which Member States were allowed to apply a reduced or zero VAT rate), while the latter are services which, according to the European Commission, had "to be taxed at the standard VAT rate".   

Newscorp case - background

In respect of pre-2018 periods, the taxpayer contended that, under UK domestic law, digital newspapers that were "fundamentally the same or very similar" to the printed editions were zero-rated.

EU law allows Member States to continue to grant reduced or zero VAT rates where Member States applied such rates at 1 January 1991 (Article 110 of the Principal VAT Directive). As UK law provided for the zero-rating of "newspapers, journals and periodicals" (now Item 2 of Group 3 in Schedule 8 to VATA 1994) as at that date, Article 110 clearly permitted the UK to maintain this zero-rating.

Digital newspapers did not, however, exist in 1991. So, zero-rating digital newspapers would be a de facto extension of Item 2 of Group 3 which - according to EU law - must be construed strictly. 

Newscorp case - the decision

The Upper Tribunal did not, however, regard this as an obstacle: as Article 110 "defers to the domestic law of each Members State, it is the domestic law which we must apply" and, on the basis that digital newspapers are "properly to be characterized (according to principles of UK law) as within the genus of things that the pre-1991 legislation did exempt", they were zero-rated.  That digital newspapers are services rather than goods and that European Commission clearly thought that pre-2018, a zero-rating of digital newspapers was not permissible was held to be irrelevant.

It seems that the Upper Tribunal took a rather bullish approach to the interaction between UK and EU law. Could this be a sign of things to come following Brexit?