DECISION
1. Harrier
LLC (“Harrier”) appeals against a decision of HMRC, in a letter dated 19 May
2010, to refuse a voluntary disclosure for an alleged amount of overpaid output
VAT in respect of certain supplies made by Harrier to, amongst others, Hewlett
Packard and Tesco. The decision relates to the VAT periods 06/06 to 12/09, and
the amount of alleged overpaid VAT is £545,800.66.
2. The
dispute concerns the correct treatment of the supplies Harrier makes in
relation to what are termed “photobooks”. Put briefly, Harrier says that its
supplies are of goods, and that those goods are books or booklets and as such
the supplies of them are zero-rated within Item 1, Group 3, Schedule 8 of the
Value Added Tax Act 1994 (“VATA”). HMRC, on the other hand, say that, firstly
the photobooks in question are not books or booklets for the purposes of the
legislation, and secondly that Harrier’s supplies in this respect are not
properly to be viewed as supplies of goods (the photobooks themselves) but are
instead supplies of photographic services which do not fall within the
zero-rating provision.
3. This
appeal has been directed to be a lead case under rule 18 of the Tribunal
Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, and cases which have
common or related issues of fact and law have been stayed behind this appeal.
The common or related issues have been directed as follows:
(1)
Whether the supply of “photobooks” is a supply of goods, and if so
whether such supply is a supply falling within the definition of “books,
booklets, pamphlets and leaflets” and therefore zero-rated by virtue of Item 1,
Group 3, Schedule 8 VATA.
(2)
Alternatively, whether the supply of “photobooks” constitutes a supply
of services, in particular photographic services.
(3)
In so far as it is determined that a supply of “photobooks” is in
principle capable of falling within either (1) or (2) above, what are the
characteristics of the supply that determine whether the supply falls within
(1) and (2)?
4. Harrier
was represented by Leslie Allen of DLA Piper. Owain Thomas appeared for HMRC.
The facts
5. We
had witness statements for Harrier from Mr Graham Clark, the finance director
and company secretary of the company since March 2004, and from Mr Andrew
Bascombe, the IT director of Harrier since January 2001. For HMRC, we had a
witness statement from Mr Michael Hill, a higher officer of HMRC, who was
engaged in a review of the voluntary disclosure with which we are concerned.
Each of these witnesses gave oral evidence and was subject to cross-examination.
We also had a bundle of documents.
6. From
the evidence before us we find the following material facts.
7. Harrier
is a limited liability company registered in the State of Maryland, USA. It is registered under the Companies Acts as a foreign company.
8. Harrier’s
business is currently that of a high-tech digital printing, photo-processing
and personalised gift manufacturing company. It was originally solely focussed
on its photo-processing business, under the well-known trading style of
“Truprint”. This included processing analogue film sent to the company in a
freepost envelope, with the developed printed photographs and negatives being
received by the customer through the post a few days later.
9. With
the onset of digital photography the world of analogue film has all but gone.
It has given way to internet driven, digital photo processing. Harrier’s
business has changed from a “direct to consumer mail-order photo processing”
business to a wholesale “business to business” digital photo-processing operation,
and expanding into digital printing and personalised gift manufacturing.
10. The photobooks
business is largely web-based. The Truprint brand is now more commonly
associated with a website that is operated by Hewlett Packard under licence
from Harrier. This creates what is described as a co-brand relationship
between Harrier and Hewlett Packard in relation to Truprint. Hewlett Packard
also has its own website in the UK called “Snapfish”; Harrier is one of the
suppliers dealing with the fulfilment of orders for that website.
11. In addition,
Harrier produces photobooks for customers who create their products by
uploading images to kiosks in high street stores, such as Tesco, Sainsbury and
Asda.
12. The process of
ordering a photobook from the Truprint website involves the customer in the
following (abbreviated) steps:
(1)
Following registration, the customer will navigate to the “Photo Books”
page. This exhorts the customer to “Get creative with personalised
photobooks! Create custom books to celebrate birthdays, special occasions, new
babies, or even archive favourite family recipes.” The different products
(which we shall consider later) are described.
(2)
The customer can then navigate to a new page for the type of photobook
chosen. The customer chooses photos from albums that are uploaded by the
customer, and other images. The images chosen by the customer may be of
anything: they could be photographs from a digital camera uploaded to the
website, text, drawings, sketches, handwritten text and printed material, which
are scanned and uploaded to the website.
(3)
Those photos and other images are then used to populate the particular
photobook format that has been selected. The customer chooses the layout for
each page and the relevant image is then dropped into a template or slot. The
layout is shown, with the position of the photo or text, and with space for
additional text to be uploaded or added by the customer. Although Harrier’s
own processes can accommodate any size of printed book, there is a limit of 120
-150 pages that can be ordered through the websites. There are also
restrictions on page numbers for individual products.
(4)
Once the customer has populated the pages with all the desired material,
a choice is made of the colour of the cover, and the quantity of the order.
The price is calculated by the site and an order can then be placed and
confirmed.
13. Harrier has no
control over these websites, including Truprint, nor any technological
involvement with them. Its only involvement is on the marketing side.
14. Once the
customer has placed the order, Harrier is sent an electronic data file for each
page of the photobook that the customer has created, accompanied by
instructions about exactly what product to make and the delivery address in a
further electronic file. Harrier imports the individual page data files into
pdf files (multi page computer data files, designed for printing). Once the
pdf file has been created, it is submitted to the printer. The printed sheets
are then guillotined and bound as required, in the same manner as book
manufacturing. All photobooks are printed on Indigo presses. The process is
very much a physical process with little involvement of computer data
processing. The process does not involve any photographic developing.
15. Once the photobook
or photobooks have been printed Harrier delivers the product either to the
customer directly or to the retail store through whose site the order was
made. All content uploaded by the customer is personal to that customer, and
the customer has to confirm that it owns the copyright or has permission to use
the content. Harrier cannot sell the photobooks it produces on the open
market. None of the photobooks has an ISBN number; nor is any copyright
information included in the print.
16. The relationship
between Harrier and Hewlett Packard in respect of photobooks is governed by the
terms of a Co-Branded Photo Center Agreement effective from 1 August 2008,
which refers back to a Cooperation Agreement dated 14 April 2005, as
subsequently amended. The Cooperation Agreement includes the grant of various
licences to Hewlett Packard, and for the provision by Harrier of what are
described as “photofinishing services”, of which Hewlett Packard is the
retailer. These “photofinishing services” are defined as meaning both the
photofinishing services and products, including gifts and customer support as
more particularly described in two exhibits to the agreement.
17. In the first of
those exhibits the “photofinishing services” are described in very generic
terms. Harrier’s obligations are to provide (a) photofinishing services
capable of extracting images in digital form from links, interfaces and other
connections from the Hewlett Packard products and sites; (b) a digital
photo-processing lab to fulfil all orders for photofinishing services”; (c)
resources to continually increase the quality of the photofinishing services
(including colour rendition) as mutually agreed; and (d) access to order data
required for Hewlett Packard customer support.
18. The second
exhibit consists of price schedules. This covers a wide range of items,
including prints, CDs and Flip Books and Photo cards, as well as other gift
products. Film developing, printing and scanning is included in the price
schedule. These price schedules were superseded by the 2008 Agreement. An
exhibit to that agreement contained financial provisions for numerous items
ranging from prints, postcards, notebooks and stickers to products such as
mugs, placemats and T-shirts. Included in the pricing schedule are the various
categories of memory book, a term synonymous with photobook.
19. Harrier’s
relationship with Tesco is governed by a Services Agreement. We were shown the
agreement which commenced on 1 December 2010, outside the period to which this
appeal relates. That agreement recites that Tesco wishes to appoint Harrier as
its provider of personalised gifts and photographic prints both in stores and
online, and that Harrier wishes to be appointed to provide services to Tesco.
20. In this
agreement both “Products” and “Services” are defined by reference to separate
schedules. The services are described separately as “Online service” and
“In-store service”. As regards the Online service, Harrier undertakes to
supply and produce the relevant Products ordered by customers online. Harrier
also agrees to provide support services, including promotional support, and to
deliver the Products to the customer’s home or to the relevant Tesco store
within a specified period. The Products are listed in a separate schedule, and
again range from regular prints, through photo gifts, to memory books and
various descriptions of goods.
21. We were provided
with a number of examples of the photobooks produced by Harrier which are
concerned in this appeal. The following is our own description taken from our
own observations of the items exhibited:
(1)
3” x 2” Mini memory book. This consists of a bound series of single
photo images on both sides of the leaves within it. The leaves have the
character and appearance of thin glossy paper, and not of photographic prints.
Its cover and back is a little thicker than the leaves within. The cover has a
photo image and a title, but there is otherwise no text.
(2)
6” x 4” Flipbook. This comprises single photo images on glossy
paper bound together by spiral binding. Each leaf has a single image on one
side only and has the character and appearance of an individual photographic
print. Some of the images are accompanied by short textual descriptions on the
same page as the relevant image. The back cover is the same quality as the
leaves, but there is a front cover of translucent plastic material. (In the
example we had there were two leaves of this translucent plastic at the front.
We think it likely that the second sheet should have been at the back.)
(3)
7” x 5” Flipbook. Apart from the example we had having only one
sheet of translucent plastic on the front cover, and also having a translucent
sheet on the back, this was identical in description to the 6” x 4” Flipbook
(save only for its size).
(4)
7” x 5” Memory book (“Everyday memory book”). This consists of a
series of leaves bound in a medium soft card cover, of greater thickness than
the leaves within. The front cover has a window through which the photo image
on the first inside leaf can be seen. The images in this case are on both
sides of the inside leaves, and range from single to multiple images per page.
Images other than photos are included, and there are text descriptions on many
of the pages. One page consists entirely of text written by the customer.
(5)
8” x 8” Photobook. This has a hard cover front and back with a
downloaded photo and a title on the front cover. A downloaded photo also
appears on the back cover. Inside is a blank non-glossy sheet front and rear.
The leaves are glossy and include photo images, between one and four per page,
and text, on both sides of the paper. Some leaves have photo images only, some
have only text, and others a mixture of the two.
(6)
11” x 8” Classic memory book. This has a hard linen cover front
and back, and a dust jacket with a full page photo image on the front,
including title, and a small image on the back. There is an inside front page
which has the title printed on it. A blank back page – save only for a logo,
barcode and product description – is also included. The inner leaves comprise
a mixture of photo images, some full-page, some not, and text, on both sides of
the page.
(7)
11” x 8” Classic memory book. This is effectively the same
product as that described in (6), except that it does not have a dust jacket and
its front cover has a window through which the first leaf – a title page can be
observed. In this example the content is principally photo images, with text
confined to headings and short descriptions.
(8)
11” x 8” Picture cover book. This product is similar to (6) and
(7), but its front cover is a laminated full-page photo image, and its back
cover is also laminated, with a smaller photo image and some text. Although
its photographic pages are similar to those in (7), this example was
distinguished by having 7 pages wholly devoted to text at the beginning.
(9)
Picture me book. This is a small bound volume comprising leaves
of laminated card bound together. The cover and the inner leaves are of
identical material. Most of the content appears to have been pre-populated
with pictures. The added content from the customer is limited to pictures of a
child’s or children’s faces that are superimposed into the spaces in the
pictures provided.
The law
22. Where the supply
of goods or services is zero-rated, no VAT is charged on the supply, but it is
otherwise treated as a taxable supply (s 30 VATA), so entitling the supplier to
recovery of attributable input tax.
23. The authority
for a Member State to apply zero-rating derives from Article 110 of Council
Directive of 28 November 2006 (“the Principal VAT Directive”) (2006/112/EC):
“Member States which, at 1 January 1991, were
granting exemptions with deductibility of the VAT paid at the preceding stage
or applying reduced rates lower than the minimum laid down in Article 99 may
continue to grant those exemptions or apply those reduced rates.
The exemptions and reduced rates referred to in the
first paragraph must be in accordance with Community law and must be adopted
for clearly defined social reasons and for the benefit of the final consumer.”
24. The zero-rating
description at issue in this appeal is that in Item 1, Group 3, Sch 8 VATA.
Group 3 is short, and the applicable version can be reproduced in full:
“ Group 3 — Books, etc
Item No
1 Books, booklets, brochures, pamphlets and
leaflets.
2 Newspapers, journals and periodicals.
3 Children's picture books and painting books.
4 Music (printed, duplicated or manuscript).
5 Maps, charts and topographical plans.
6 Covers, cases and other articles supplied with
items 1 to 5 and not separately accounted for.
[Note: Items 1 to 6—
(a) do not include
plans or drawings for industrial, architectural, engineering, commercial or
similar purposes; but
(b) include the
supply of the services described in paragraph 1(1) of Schedule 4 in respect of
goods comprised in the items.”
25. Section 30 (2A)
VATA treats certain services associated with the production of goods as
zero-rated, if the supply of the goods would itself be zero-rated. It
provides:
“(2A) A supply by a person
of services which consist of applying a treatment or process to another
person's goods is zero-rated by virtue of this subsection if by doing so he
produces goods, and either—
(a)
those goods are of a description for the time being specified in Schedule 8; or
(b)
a supply by him of those goods to the person to whom he supplies the services
would be of a description so specified.”
Discussion
26. As we outlined
at the beginning of this decision, there are essentially two issues between the
parties. Taking them in the order in which we intend to address them they are,
firstly, whether, as Harrier says, the supplies it makes in respect of
photobooks are single supplies of goods, or, as HMRC argue, are supplies of
services, namely photographic services, which are not zero-rated, and secondly,
if the supplies are supplies of goods, whether they are supplies of books or
booklets, so as to be zero-rated.
Supplies of goods or services
27. Mr Thomas
submitted that the analysis of the contracts entered into by Harrier shows that
the supplies it makes are supplies of services. The supplies made by Harrier
are not to the final consumer, but to the retailer, or website operator. Those
supplies, he argued, were described as services in the relevant agreements. Mr
Thomas argued that Harrier is not supplying books to its customer. It is
supplying a digital photograph printing and processing service. The content is
provided by the ultimate consumer, via the website of Harrier’s customer.
Harrier has no influence over the content. Accordingly, Mr Thomas reasoned,
Harrier’s role is the provision of a service to its customer.
28. We do not
consider that an analysis of the contracts in question supports Mr Thomas’
arguments. The references in the agreement with Hewlett Packard to “photofinishing
services” were not confined, according to the definition of that term, to
services. The defined term encompassed the provision of products as well as
services. The price schedule covers pricing for both goods and services, each
of which is included in this global agreement. Accordingly, the nature of the
supply is not determined by the label the parties to the agreement have chosen
to use to describe the obligations in relation to the supply of both goods and
services.
29. In our view, on
this analysis, the supplies of photobooks by Harrier to Hewlett Packard are
supplies of goods. We accept, however, that the obligations of Harrier in
respect of those supplies include elements of service provision, as set out in
the description of “photofinishing services” in the first of the exhibits to
the Cooperation Agreement to which we referred above.
30. A similar
analysis applies to the Tesco Services Agreement. That agreement also covers
both services and goods. The services and goods are covered by separate schedules,
with memory books firmly in the schedule related to goods. As regards the
online service, Harrier agrees to provide certain services related to the
supply of the goods. We find that in this respect also, Harrier’s supply of
the photobooks is one of goods, with some related services.
31. As we have found
that there are supplies of both goods and services, we have to consider whether
the transaction should be regarded as a single composite supply,
notwithstanding the inclusion within it of components that are identifiable as
separate supplies, and, depending on the outcome of that analysis, whether the
resultant supply is a supply of goods or services.
32. In this context
it suffices for us to refer only to one authority, that of the ECJ in Levob
Verzekeringen BV and another v Staatssecretaris van Financiën (Case
C-41/04) [2006] STC 766. That case concerned a supply of a customised version
of standard software. The contract broke the price down into a sum payable for
the basic software and the cost of customisation. The issue was whether there
had been separate supplies of the basic software and the customisation services
or a single supply. The ECJ held that there was a single supply which, in the
light of the degree and importance of the customisation process, had to be
classified as a supply of services.
33. Referring to the
earlier case of Card Protection Plan Ltd v Customs and Excise Commissioners
(Case C-349/96) [1999] STC 270, the Court affirmed that a transaction which
comprises a single supply from an economic point of view should not be
artificially split, and that there is a single supply in particular where one
or more elements are to be regarded as constituting the principal supply,
whilst one or more elements are to be regarded as ancillary supplies which
share the tax treatment of the principal supply. The Court also held that the
same is true where one or two elements or acts supplied by the taxable person
are so closely linked that they form, objectively, a single, indivisible
economic supply which it would be artificial to split.
34. Mr Thomas argued
that even Harrier established that it supplies goods to its customers (which we
have found to be the case) the digital photographic printing service provided
was the dominant element such that the particular format of printing is a means
of better enjoying that service, and is an enhancement on the simple provision
of printed photographs. We do not agree. In our view, looking at the
objective characteristics of the supplies that Harrier makes, the principal
supply is clearly that of the photobooks themselves, a supply of goods. The
services that surround that supply, including the making available of the
production process, are ancillary to the supply of the goods. Those supplies
are so closely linked that, viewed objectively, they form a single, indivisible
supply, and that is, in this case, a supply of goods. This is not a case,
unlike Levob, where an existing product was customised to such an extent
that the customisation service dominated. Here what Harrier does is provide a
product, which it produces to a customer specification. That supply of the
product itself is the predominant supply, and the composite supply by Harrier
is accordingly a supply of goods.
35. We are not
deflected from this finding by what was decided by a VAT tribunal in Risbey’s
Photography Limited, Digital Albums Limited v Revenue and Customs Commissioners
(22 August 2008; no 20783). In the case of Digital Albums the supply position
was analogous to that in this case. As the tribunal found, Digital Albums
designed a wedding book to the order of a particular photographer by assembling
the photographs supplied with the use of digital photographic processes. The
layout of the wedding book and the photographs included were approved by the
customer, and the customer retained the copyright in the photographs.
36. The tribunal
concluded on this basis that on balance the supplies made by Digital Services
were a single supply of photographic services. However, the tribunal provided
no reasoning for this finding. We have reached a different conclusion in this
case, for the reasons we have given.
37. We should note
that we were in the course of argument referred to paras 7.1 and 7.3 of Public
Notice 701/10 (Zero-rating of books etc). Whilst we place no reliance on that
Notice, we note that in para 7.1 it states that where a service is of the
production of goods it will be zero-rated where the service has produced new
goods and those goods are themselves zero-rated. Paragraph 7.3 expands on that
to explain the view of HMRC as to when new goods are produced. For example,
zero-rating applies to preparatory and post-production work (other than
alterations) that are performed in conjunction with the supply of zero-rated
goods. With respect, we consider this to be a correct analysis. It follows,
we consider, from the fact that the supply of the zero-rated goods in those
circumstances is the dominant supply, so that any ancillary supply of services
in connection with it is likewise zero-rated.
38. In view of our
decision on the nature of the supply, we do not need to consider the
application of s 30(2A) VATA.
Are the photobooks “books or booklets”?
39. In light of our
conclusion on the nature of the supplies made by Harrier, the real issue is
whether the photobooks supplied by it are “books or booklets” within Item 1,
Group 3, Sch 8 VATA.
40. Mr Thomas
referred us to Article 110 of the Principal VAT Directive, and to the
derogation it provides for the zero-rating regime. In this context he took us
to the judgment of the ECJ in Talacre Beach Caravan Sales Ltd v Customs and
Excise Commissioners (Case C-251/05) [2006] STC 1671. He submitted that
the provisions of the Directive laying down exceptions to the general principle
that VAT was to be levied on all goods and services supplied for a
consideration by a taxable person were to be interpreted strictly. He argued
that the zero-rating regime must be interpreted so as to comply with the
provisions and conditions setting out the scope of the derogation. He referred
in particular to paras 17 and 18 of the judgment:
“17. It should be noted from the outset that, in
authorising member states to apply exemptions with refund of the tax paid, art
28(2) of the Sixth Directive lays down a derogation to art 12(3) thereof, which
governs the standard rate of VAT.
18. It is apparent, secondly, from the wording of
art 28(2)(a) of the Sixth Directive that the application of exemptions with
refund of the tax paid is subject to a number of conditions. Those exemptions
must have been in force on 1 January 1991. In addition, they must be in
accordance with Community law and satisfy the conditions stated in the last
indent of art 17 of the Second Council Directive 67/228 of 11 April 1967 on the
harmonisation of legislation of member states concerning turnover
taxes—structure and procedures for application of the common system of value
added tax (JO L71 14.4.67 p 1303 (S Edn 1967 p 16)), now repealed, which
provided that exemptions with refund of the tax paid could only be established
for clearly defined social reasons and for the benefit of the final consumer.”
41. Talacre Beach
was concerned with a claim by the taxpayer that certain items that were at the
relevant date for the derogation (1 January 1991) specifically excluded from
zero-rating, should nonetheless be zero-rated as part of a single supply the
principal supply of which was itself properly zero-rated. The ECJ held that
the provisions of the Directive (at that time the Sixth Directive), construed
restrictively, could not cover items that were, as at 1 January 1991, excluded
from the zero-rating by the national legislature. The fact that the
transaction in question could be characterised as a single supply did not
affect that conclusion. The case law on the taxation of single supplies (including
Card Protection Plan and Levob) does not preclude some elements
of a supply from being taxed separately where that complies with the conditions
of the derogation (Talacre Beach, judgment, paras 23 and 24).
42. In Talacre
Beach the taxpayer was relying on the terms of the principles, those
regarding single supplies, of the Sixth Directive. In this case we are not
concerned with the construction of the terms of what is now the Principal VAT
Directive, but with the meaning of the domestic legislation which is permitted
under the terms of the derogation. It is right that exemptions (including, in
this context, zero-rating) in the Directive fall to be construed strictly (but
not, it should be observed, restrictively; see Commissioners for Customs and
Excise v Axa UK plc (Case C-175/09) [2010] STC 2825, at [25]), but what we
are concerned with here is the construction of the UK domestic provision, which
will fall to be construed in accordance with ordinary principles of statutory
construction. Nor is this case concerned with any items that are specifically
excluded from the zero-rating treatment.
43. If, applying a
strict construction of the derogation provisions of the Directive, we were to
conclude that the UK domestic legislation went too far, that would not assist
HMRC. It is a well-established principle that, whereas an affected person can
rely upon the Directive if the domestic legislation does not properly implement
it, such reliance is not available to the Member State (see, for example, Marshall v Southampton and South West Hampshire Area Health Authority (Teaching)
[1986] QB 401, judgment para 48). If therefore the zero-rating provisions go
further than the derogation would allow, the taxpayer is entitled to rely on
the domestic provisions.
44. Nor can the
domestic provisions be construed so as to reflect only the circumstances
applicable at the relevant date of 1 January 1991. Mr Thomas referred in
argument to Article 110 being a “standstill” provision. It is that, in the
sense that the domestic law had to provide for the zero-rating at 1 January
1991, and no new zero-rating could later be introduced. But a provision which
provides for zero-rating for a category of goods cannot itself stand still, any
more than the commercial world can (or will) do so. Technological advances in
printing mean that products which in 1991 would not have been conceived of are
now a reality, and fall to be classified for VAT purposes. If the construction
of the domestic provisions encompasses those new products, they will fall to be
zero-rated.
45. Both parties
agreed that the leading domestic authority on the approach to the meaning of
“book” or “booklet” for the purpose of Item 1, Group 3, Sch 8 VATA is Customs
and Excise Commissioners v Colour Offset Limited [1995] STC 85 (QB) in the
High Court. The issue in that case was whether diaries and address books came
within the meaning of “books” or “booklets”. It was held that they did not.
46. In his judgment
May J considered the meaning of these terms for these purposes and said (at pp
89 – 90):
“In my judgment, the English word 'book', although
it always refers to an object whose necessary minimum characteristics are that
it has a significant number of leaves, now usually of paper, held together
front and back by covers usually more substantial than the leaves, is a word
with a variety of possible more particular meanings. For any particular use of
the word, its particular meaning will be derived from the circumstances in
which it is used. For instance, if a barrister in the clerks' room of his
chambers points to a blank counsel's notebook and says to his clerk 'please
hand me that book', he would not expect the answer 'that is not a book'. (Mr
Tallon surprisingly submitted that a counsel's notebook might not be a book
because it was perforated—a point which he also made in relation to a cheque
book.) On the other hand if the same counsel, having a substantial collection
of law reports and legal textbooks in his room, asked the same clerk to count
all the books in his room, he would not expect the clerk to include blank
counsel's notebooks in the count. If a testator uses the word 'books', the word
obviously has to be understood in the context of the objects which the testator
in fact has to bequeath.
In the first instance, the only circumstance here is
that the words 'books' and 'booklets' are used in the Schedule to a statute.
They are accordingly relevantly devoid of context. Devoid of context, in my
judgment the ordinary meaning of the word 'book' is limited to objects having the
minimum characteristics of a book which are to be read or looked at. (The same
applies to 'booklet', which I think is a thin book perhaps with a rather flimsy
cover. I am not sure about the Shorter Oxford English Dictionary
definition of booklet as 'a tiny book', since I would not myself call a tiny
book with many pages a booklet.) If you ask of a particular object 'is this a
book?', you immediately provide a context, which the words in the statute lack.
You will get an answer which is affected by the context. If you ask instead
what I regard as the right question here, ie 'what is the ordinary meaning of
the word “book”?', you should get an answer which accords with the ordinary
meaning to which I have referred. As Mr Richards submitted (although he accepted
that these diaries and address books might be books or booklets within one
possible meaning of those words), people generally think of books as things to
be read rather than as blank pages bound together. A filled-in diary of
historical or literary interest may be a book because it is retained to be read
or looked at. But a blank diary is not a book in the ordinary sense of the
word. Likewise a blank address book is not in the ordinary sense a book and it
does not become one simply because its name includes the word 'book'. A cheque
book is plainly not a book nor, in my view, is it a booklet in the ordinary
sense of that word. The fact that in some contexts you would say of a blank
diary that it is a book within one possible meaning of that word does not mean
that it is a book within the ordinary meaning of the word.
There is in my view no reason for reading the words
'books' and 'booklets' in item 1 of Group 3 of Sch 5 to the 1983 Act in a more
extended meaning than their ordinary meanings.”
47. The words “book”
and “booklet” are accordingly to be given their ordinary meaning, devoid of
context. The ordinary meaning of “book” refers to an object that has the
necessary minimum characteristics of having a significant number of leaves,
usually of paper, held together by front and back covers usually more
substantial than the leaves. The word “booklet” refers to a thin book, perhaps
with a more flimsy cover, having a less significant number of leaves. But in
each case those minimum characteristics are not enough. To be a book or
booklet the item in question must be one that is to be read or looked at. A
diary or address book could not qualify on this basis, because it consisted of
blank pages. But books and booklets are not confined to literary works to be read;
works comprised solely of images to be looked at can equally be books or
booklets.
48. We were referred
to a number of tribunal decisions. In Ormesby St Michael PCC v Customs and
Excise Commissioners (24 August 2001; no 17375), the VAT & Duties
tribunal followed Colour Offset and held, albeit reluctantly, that a
church memorial book that was a leather-bound book of A4 size containing 150
blank pages did not constitute a book. Colour Offset was also followed in
Tudor Print & Design Limited (2 October 2002; no 17848), a case concerning
a diary which included a substantial amount of text relating to sporting
events.
49. In Global
Games International Limited v Customs and Excise Commissioners [2005]
V&DR 246, the VAT Tribunal held that a “Full Licence Pass the Test Theory
Test Card Game” which consisted of 54 cards, bound together at their left-hand
edges by transparent paper, was not a book. The cards were to be used as a
game, and the tribunal found that the game could only effectively be played by
removing the cards from the spine. The tribunal considered the physical
characteristics, the function and the content. The fact that the game was
viewed as a book by booksellers and buyers was irrelevant.
50. The tribunal in Global
Games expressed the view that “the nature of a book, be it a work of fact
or fiction, is that it has a beginning and an end and, in between the beginning
and the end, one is taken on a journey between various points, absorbing
information in so doing.” We respectfully disagree with this view. It assumes
that a book must contain a narrative, which is not the case, as illustrated by
the reference made by May J to the object being “looked at” as well as read.
This is thus too restrictive a construction.
51. That said, we
respectfully agree with the tribunal’s conclusion in Global Games. As
the tribunal pointed out, even if the cards were simply read, without
separating them to play the game, that would not be reading a book; it would be
reading a series of cards that just happen to be bound together. But that is
not, in our view, because there is no indication of a systematic approach that
is to be adopted; it is because in substance the item was a mere collection of
cards bound together. It did not have the inherent quality of a book.
52. In Risbey’s the
VAT tribunal decided that wedding books did not constitute books. The wedding
books consisted of images with some accompanying text. After referring to Colour
Offset, and another (unpublished) tribunal decision, Donald Arthur
Draper v Customs and Excise Commissioners (27 April 1981), the tribunal
said (at paras 24 and 25):
“24. The
Appellants' wedding book shared many of the physical characteristics of a book,
in that it has leaves of paper bound together within a hard cover. We would,
however, agree with the Respondents' observation that the pages were thicker
than what would normally be found in a book. We consider that the wedding book
was a pictorial record of a wedding which was of interest only to the persons
immediately connected with the event. The text in the wedding book did not
convey information and had no value in its own right, which could be deleted if
the bride and groom did not want it. The Appellants marketed the wedding book
on their websites as a wedding album. The fact that the pictorial record of the
wedding book was permanent and could not be altered after publication did not,
in our view, alter the fundamental character of the book as a wedding album.
The Appellants' wedding book was a consequence of advances in photographic technology
which increased the range of physical manifestations of wedding albums. We find
the term wedding album should not be restricted to a traditional form which
allowed the removal and insertion of photographs. Such a restriction would be
contrary to the Community principle of equal treatment which ensures that
similar goods in competition with each other, are not treated differently for
the purpose of value added tax. We conclude that the Appellant's wedding book
was to all intents and purposes a wedding album.
25. We
find that the Appellants' wedding book did not come within the ordinary meaning
of a book. The wedding book in essence was a collection of photographs which
was of interest only to the persons immediately connected with the wedding. The
text included in the book was optional, and if incorporated did not convey
information and had no value in its own right. The functional characteristics
of the wedding book as a wedding album outweighed its physical similarities to
a book. We hold that the Appellants' supplies of a wedding book were standard
rated for VAT purposes.”
53. With respect, we
are unable to follow the tribunal’s approach in Risbey’s. In our view
it does not properly follow the approach adopted in Colour Offset,
namely to consider the ordinary meaning of “book” as one having the minimum
characteristics of a book which is to be read or looked at. The basis of the
tribunal’s decision was that the fundamental character of the item in question
was as a wedding album, essentially because it was in essence a collection of
photographs which was of interest only to the persons immediately connected to
the wedding. It seems to us that this analysis falls into the error of
attaching a label to an item which does not feature in any specific exempting
or zero-rating provision, and concluding that such an item must therefore be
standard-rated (see Bophuthatswana National
Commercial Corporation Ltd v Customs and Excise Commissioners [1993] STC 702, per
Nolan LJ at p 708). The diaries and address books in issue in Colour
Offset did not fall outside the description of books or booklets because
those labels could be attached to them; they failed to satisfy the test of
being a book or booklet because, on account of the blank pages within them,
they did not fall within that description, according to the ordinary meaning. We
do not ourselves consider that it follows from the application of the
description “wedding album” to something that has the characteristics of a book
that the item is not a book for VAT purposes. A wedding album will in many
cases not have the characteristics of a book, but if it does, we can see no
reason why it should not be a book for these purposes.
54. In particular,
we do not share the tribunal’s views on the weight to be attached to matters
such as the limited interest in the contents, the tribunal’s assessment that
the text did not convey information and had no value in its own right, or the
label attached to the book in its marketing. Nor do we consider that the
tribunal was right to attempt to construe the label “wedding album” by
reference to the principle of equal treatment. The question was not whether
the item was a wedding album, but whether it was a book.
55. Mr Thomas argued
that the express inclusion of children’s picture books serves to demonstrate
that such items would otherwise be excluded. We agree, but we concur with Mr
Allen that this is not because picture books would be otherwise excluded, but
because children’s picture books may not satisfy the minimum characteristics of
a book at all, by reason of being made of cloth or plastic or some other
child-friendly material. Mr Thomas also argued that the express exclusion of
plans or drawings for industrial, architectural, engineering, commercial or
similar purposes also serves to exclude charts which are of benefit only to
particular individuals. But here the express exclusion is in our view mainly
because such items could otherwise fall within Item 5, although the fact that
they are excluded from Item 1 as well suggests that otherwise such items could,
in particular circumstances, be within the ordinary meaning of “book”, so that
the fact of limited benefit or interest cannot prevent an item being within
that ordinary meaning.
56. We do not accept
therefore Mr Thomas’ submission that the personal nature of the photobooks is
such as to distinguish them from books on any ordinary appreciation of that
word. Nor do we accept that the ordinary meaning of books is confined to those
published for public consumption and public benefit. Mr Thomas argued that the
same public interest justifies the inclusion of the other items in Group 3, Sch
8, and that the printing of family or other photographs in a series of
different formats to function as an album does not obviously engage any
particular social benefit which is the underlying basis for the zero-rating
regime. We do not agree. Group 3 could have imposed a social benefit
condition, but it did not; instead it applies where an item objectively falls
within any of the stated classes. We do not think it can be said that all of
the items necessarily engage any social benefit. Some, like newspapers,
journals and periodicals, are perhaps more likely to do so than others, such as
brochures and pamphlets. There is in our view, therefore, no social benefit gloss
on the ordinary meaning of books or booklets for this purpose.
57. In our view, and
following Colour Offset, we must have regard to the ordinary meanings of
the words books and booklets, devoid of context. The test is an objective one,
and must be determined by reference to all the physical characteristics of the
product in question. That includes both the external characteristics and the
internal characteristics.
58. As far as
external characteristics are concerned, the essential minimum characteristics
are that the object must have leaves (a significant number for a book, less so
for a booklet), and those leaves must be held together front and back by covers
that are usually more substantial than the leaves. In our view the nature of
the binding is also an essential minimum characteristic. We consider that a
book or booklet must have a spine, which will be narrower in the case of a
booklet than it is with a book. For this reason, in our view, a product that
is simply spiral bound does not have the necessary minimum characteristics.
59. It is clear that
a book (or booklet) must have content. Something that has the physical
characteristics of a book, but no content, such as a memo book with blank
pages, a diary with printing confined to the days of the week and ancillary
information, or an address book with printed headings and ancillary material,
is not a book (or booklet) in the ordinary sense of the word.
60. The nature of
the content, provided it is something that can be read or looked at, is not,
however, material. A book can have content that is exclusively text, or
exclusively material such as photographic images or diagrams or drawings, or
any mixture of that content. If not excluded by Note (a) of Group 3, such
products can fall within Item 1 as books or booklets. It is true, as Mr Thomas
submitted, that a VAT tribunal in Interleisure Club Limited (25 March
1992; no 7458) decided that case by reference to the contents of a leisure
guide published and sold by the taxpayers, but the basis of that decision was
not that the guide was not a “booklet” (it clearly was), but that the supply
was of a service, by means of the vouchers contained within the booklet. The
contents did not prevent the guide from being a booklet, but they had the
effect that the supply was of a service, and not of goods.
61. On the other
hand, although the nature of the content is not material, it is necessary to
consider the internal physical characteristics. The inner leaves of what would
otherwise have the external appearance of a book (or booklet) must also, in
substance, have the appearance and quality of the pages of a book. This will
not, in our view, be the case if those inner leaves merely have the appearance
and quality of a series of individual photographs bound together (whatever may
be the nature or appearance of the binding itself).
62. We have reached
this conclusion without reference to a Dutch case, in the District Court of
Haarlem, under the name X BV (Procedure numbers ANW 08/6319 and AWB
08/6320, judgment delivered 18 December 2009) to which we were referred by Mr
Allen. The facts of that case are similar to those in this appeal, and the
issue was whether the reduced VAT rate of 6% under Dutch law for supplies of
books applied.
63. The District
Court held that the printed matters supplied were books within the meaning of
the Dutch VAT Act. In making this finding the court rejected a number of
arguments by the Dutch tax authorities, including that the products did not
have the appearance of a book as the name of the author and the title were not
stated on the cover, and that a product could not be a book if it was not
intended for public distribution. The court held that the fact that the
product consisted of images and/photographs and little text need not preclude
that its contents could be regarded as a book. However, it should be noted
that the parties in that case did not dispute that a book of photographs could
be a book. Arguments on fiscal neutrality relating to the printing of
photographs, and the supply of empty photo albums were also rejected, as those
goods were found to be dissimilar to the products in question.
64. We have placed
no reliance on this Dutch case, but we refer to it here because we heard
argument on it. We base our conclusions solely on the legal principles applicable
to the construction of our own domestic law. In so far as the conclusions of
the Dutch court correspond to our own, that would appear to support our own
findings, but it has played no part in our determination.
65. With the tests
we have concluded are applicable in mind, we turn to consider each of the
photobook products at issue before us.
(1)
3” x 2” Mini memory book. We find that this is a booklet. It
has the external appearance of a booklet, and although it consists entirely of
photographic images, the pages on which those images are printed have the
appearance and quality of the pages of a booklet.
(2)
6” x 4” Flipbook. In our view this fails the test. It does so
both on account of its spiral binding which does not satisfy the minimum
characteristics for the external appearance of a book or booklet, and the fact
that its leaves have the quality and appearance of individual photographic
prints, and not pages of a book. Accordingly, we find that this is not a book
or a booklet.
(3)
7” x 5” Flipbook. This fails for the same reasons as its smaller
cousin and we make the same finding in respect of it.
(4)
7” x 5” Memory book (“Everyday memory book”). We find that this
is a booklet. It has the appearance of a thin book and its pages, which
include both photographic images and some text, have the appearance and quality
of the pages of a booklet.
(5)
8” x 8” Photobook. We find that this is a book. Its external
appearance, including its hard covers front and back, and its spine, has the
appearance of a book. Inside its front and back sheets also have the
appearance of a book, and its pages have the appearance and quality of the
pages of a book.
(6)
11” x 8” Classic memory book. We find this is a book. Its hard
linen cover, and dust jacket have all the external appearance of a book. The
inside pages also have the appearance and quality of the pages of a book.
(7)
11” x 8” Classic memory book. Likewise we find that this is a
book. The absence of a dust cover, and the fact that the title page can be
observed through a window in the front cover, do not make it distinguishable
from the product in (7).
(8)
11” x 8” Picture cover book. This again we find is a book. It
is again distinguishable from similar products in (6) and (7) only in the style
of its cover. That does not detract from its appearance as a book in common
with those products.
(9)
Picture me book. Although this product has a cover and back of
identical material to the inner leaves, and those leaves are of laminated card
and not paper, we consider that it nevertheless has both the external and
internal appearance of a book. If we are wrong on this we would find that it
should be zero-rated as a children’s picture book in Item 3, Group 3.
66. Mr Thomas
submitted that to treat the photobooks as books or booklets within Item 1,
Group 3 would extend the scope of the zero-rating provision beyond its terms
and evident scope and would thus amount to an illegitimate extension of the
derogation authorised by the Sixth and now the Principal VAT Directive. To the
extent we have decided that certain of the photobooks do fall within the
ordinary meaning of those terms, we do not agree. The derogation authorised
the continuation of an existing statutory provision, and we have decided that
on its proper construction it encompasses certain of the products at issue in
this appeal. That is a recognition of the scope of Item 1, not an extension of
it. In our view, HMRC’s argument is for a restricted meaning of books and
booklets, and an effective exclusion of items that would otherwise fall within
the ordinary meaning of those terms. That is something that can only be
achieved by legislation.
Decision
67. Accordingly, we
allow this appeal in part. It will be a matter for the parties to seek to
agree the figures on application of our decision. Any dispute in that respect
may be referred back to us.
Lead case direction: common or related issues
68. We provide the
following responses to the common or related issues as directed:
(1)
Whether the supply of “photobooks” is a supply of goods, and if
so whether such supply is a supply falling within the definition of “books,
booklets, pamphlets and leaflets” and therefore zero-rated by virtue of Item 1,
Group 3, Schedule 8 VATA.
The supply of photobooks is a
supply of goods. The supplies of certain photobooks identified in this
decision fall within that definition and are zero-rated. Certain others, also
identified, do not. The basis for the distinction is set out in this decision.
(2)
Alternatively, whether the supply of “photobooks” constitutes a
supply of services, in particular photographic services.
The supply of photobooks does not constitute a supply of
services.
(3)
In so far as it is determined that a supply of “photobooks” is in
principle capable of falling within either (1) or (2) above, what are the
characteristics of the supply that determine whether the supply falls within
(1) and (2)?
Not applicable. Although we found that the activities of
Harrier in relation to the photobooks did involve the performance of certain
services, we found, for the reasons set out in this decision, that the
composite supply was a supply of goods.
Application for permission to appeal
This document contains full findings of fact and reasons
for the decision. Any party dissatisfied with this decision has a right to
apply for permission to appeal against it pursuant to Rule 39 of the Tribunal
Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application
must be received by this Tribunal not later than 56 days after this decision is
sent to that party. The parties are referred to “Guidance to accompany a
Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and
forms part of this decision notice.
ROGER BERNER
TRIBUNAL JUDGE
RELEASE DATE: 10 November 2011
