Truprint photobook VAT ruling: The inside view

By Tim Sheahan, Tuesday 06 December 2011

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Last month Truprint, the Newton Abbot-based photo finishing business, triumphed in a three-year tax battle with HM Revenue & Customs over whether it should have been charged VAT on its photobook sales.

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The company, which is owned by Harrier LLC, part of US-based District Photo, was charged £545,800 VAT on the products that were incorrectly processed as 'photo albums' rather than zero-rated books, according to reports.

Truprint has also legals fees of £500,000 to cover the period from 2006 to 2009. In addition, the company incorrectly paid tax on the items from 2009 to 2011.

According to London VAT tribunal Judge Roger Berner, the majority of Truprint’s photobooks should be classified as books due to the printed content they contain.

Leslie Allen from DLA Piper Solicitors and Mark Peters, associate director of indirect taxes at Old Mill Accountants helped Harrier in its case.

Below they outline the technicalities of what many consider to be a landmark ruling in the sale of printed photo products.

The supply of photobooks is zero-rated as books for the purposes of section 30 VATA and specifically item 1 of group 3 in schedule 8 to the Act. This was the decision of the First-tier Tribunal (Tax) (Judge Roger Berner) in the appeal of Harrier LLC.

The decision covers the supply of bound photobooks, which are often purchased online. However, certain items called 'flipbooks' (ring-bound photographic prints or those glued at the spine) remain standard rated.

Facts

Harrier is a printer, who produces photobooks for online websites such as Truprint. Customers who wish to produce and buy bound versions of images together with text can go online and make photobooks (although no text is necessary and vice versa).

The source of the content may be digital photographs, analogue pictures, drawings, sketches, as well as material from the internet and even handwriting; the make-up of the final product is entirely the customer's choice.

Yet, ultimately, what the customer receives is bound sheets with some content on each page, which will have the look and feel of any other book.

Harrier had been standard-rating their supplies to their online providers, but sought a ruling from HMRC that their supplies should be zero-rated. HMRC ruled that either the supplies were of photo albums or alternatively online photographic services (both of which are standard rated.)

The Appeal

On an appeal against HMRC's decision, the Tribunal found that (apart from the flip-books) photobooks were indeed books for the purposes of VAT: The product fulfilled the criteria of being a book and, in rejecting HMRC's view, the Tribunal found that the supply was not the composite supply of a service (although there was no reason why several 'services' might not be applied to the final production of a  zero-rated item).

The Tribunal did not feel bound by the previous case of Risbey's Photography Ltd , in which it was found that bound photographs of weddings, provided by the actual wedding photographer, did not constitute books.

Similarly, the Tribunal was not taken by HMRC's contention that the specific inclusion of children's picture books in and the exclusion of architects' plans from the zero-rating legislation meant that (as it were) adult picture books should also be excluded.

Although to some extent conjecture in the context of the present case, it is probable that children's picture books are specifically zero-rated because they can be made out of a variety of materials: sometimes fabric or plastic, as identified in HMRC's own guidance.

The Tribunal took a pragmatic approach and considered what the product actually was, deriving the ordinary meaning of a book from the item's characteristics. Thus, a book meant something to be read or looked at; and blank pages or pages to be added to (perhaps like diaries) were not books for the purposes of the Act.

A particularly important part of HMRC's case (in distinguishing a book from a photo album) was whether the product was of wider public interest; books, so HMRC maintained, were likely to have a wider audience.

The Tribunal did not accept this proposition as a determining aspect of the case. Indeed, while the Tribunal were not bound by a Dutch case about the VAT liability of similar products, the Tribunal (like the Dutch court) felt that the law did not require them to consider whether individuals other than photobook customers were interested in the products' material.

Essentially, HMRC's long standing view, as articulated in their public notices and staff manuals, that books must contain widely valuable material (as opposed to merely pictures) was rejected.

Indeed, this rejection quite properly accords with the emerging vanity publishing market (ie, books printed by unpublished authors), where the supplies of individually commissioned works are zero-rated. HMRC's own appreciation that books need not be traditionally published to benefit from the zero-rate was demonstrated by their abandoning earlier in proceedings the contention that books required an ISBN number (the traditional mark of a publication).

The Derogation

The question might be asked why HMRC should feel the need to defend a case, where the facts were so probably against them. However, it is to be remembered that the UK exceptionally enjoys the derogation for zero-rating.

The derogation allows the UK to maintain beneficial taxing policies while other member states must impose VAT at merely reduced rates. It is the very privilege of zero-rating that requires the UK to measure its effect precisely.

Thus, government policy makers may appreciate that there are potentially grey areas, yet maintain certain decisions against zero-rating for public policy reasons.

The legislation in item 1 of group 3 ("books") pre-dates the concept of printing a photobook and this in itself might have encouraged HMRC to defend the case for fear of inadvertently extending the zero-rating.

In a sense, HMRC may leave a grey area to be determined by an independent court or tribunal, the outcome of which may assist in defining HMRC's policy going forward. In this instance, the Tribunal had little difficulty identifying a book when it saw one.

Conclusion

The case of Harrier was a lead case, directed as such under rule 18 of the First-tier Tribunal rules. Therefore, other related cases may fortuitously be bound by the same decision. Indeed, other photobook printers or suppliers should be pleased that the outcome of the case ought to allow them to zero-rate their supplies.

They should also be seeking repayment of overpaid VAT from HMRC no matter what part of the supply chain they fulfilled. This is because HMRC did not raise the defence of unjust enrichment in the case of Harrier and this affords all suppliers in the chain entitlement to statutory interest.

Yet, on a note of caution, Harrier's photobooks were of a specific factual type. It may be that HMRC will not apply the judgment to all online or bespoke photographs that are bound in a book. For example, specialist wedding photographers may still have to account for VAT; and the same may apply to any trader whose principle supply is photography.

The views expressed in this article are those of the authors and not necessarily those of DLA Piper and Old Mill Accountants and Financial Planners.



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