4 Eyes Ltd: VAT, Tax and Customs Consultants

The Appellant, operating in conjunction with a major IT technology provider, provides Internet-based facilities and Internet access in retail stores for the production of photobooks. Customers can use the Internet at home or in the stores to upload material to the online system. The customer can then navigate to a page which allows him to choose the type of photobook he wants.

The customer chooses the content from the images uploaded which can include photographs from a digital camera, text, drawings, sketches, handwritten text and printed material scanned and uploaded to the website. The images are then used to populate the photobook format that the customer has selected, with the customer choosing the layout for each page. Once the customer has populated the pages with all the material, he chooses the colour of the cover and the quantity of photobooks required. The price is calculated by the site and the order is placed and confirmed.

The Appellant does not own or control the online facilities; these are owned and controlled by the IT provider. But once the order is finalised the electronic files are sent to the Appellant for processing. The Appellant imports the customer data into pdf files and prints the pages. The printed sheets are then guillotined and bound in the same manner as traditional books. The process, according to the FTT, is very much a physical process with little involvement of computer data processing and does not involve any photographic developing. Once the photobook has been printed and bound, the Appellant delivers it either to the customer or to the retail store through whose site the order was made.

All content uploaded by the customer is personal and the customer has to confirm that he owns the copyright or has permission to use the content. The Appellant 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.

The Appellant has an agreement with the IT provider under the terms of which it is described as supplying to the IT provider 'photo finishing services'. However, the price schedule to the 2008 version of the agreement includes prints, CDs, Flip books, photo cards, other gift products, postcards, notebooks, stickers, mugs, placemats, T-shirts, and various categories of memory book, which the FTT explains as being synonymous with a photobook. The agreement describes the IT provider as 'the retailer'.

The Appellant also has agreements with the retail stores. An example agreement stated that the retailer wished to appoint the Appellant as its provider of personalised gifts and photographic prints in its stores and online, and that the Appellant wished to be appointed to provide services to the retailer. This agreement also defined 'products' and 'services'. The services were described separately as “Online service”, i.e. producing and supplying the store's customers' order, and “In-store service”. The Appellant also agreed to provide support services including promotional support and to deliver the products to the customer’s home or to the appropriate store within a specified period. The products were listed in a schedule and ranged from regular prints, photo gifts, to photobooks and various types of goods.

The Appellant accounted for VAT in respect of the supplies of the photobooks but, in 2010, it submitted a voluntary disclosure to HMRC claiming a refund of overpaid VAT on the basis that the supply of photobooks to the IT provider and to the retail stores fell within item 1 Grp 3 Sch 5 VAT Act 1994, which zero-rates the supply of books, booklets, brochures, pamphlets and leaflets. HMRC rejected the disclosure on the basis that the photobooks do not fall within item 1 and the supply by the Appellant constituted a taxable supply of photographic services.

The FTT was asked to consider the VAT treatment of nine different types of photobook. As the FTT's decision on VAT liability was based on the characteristics of each, the FTT's description of the photobooks is reproduced here verbatim:

"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."

HMRC argued that, on the basis of the agreements, the Appellant's supplies constituted services.They were supplied to the IT provider or the stores, not the end consumer, and they constituted digital processing services. If there were separate supplies of goods and services, HMRC argued that they formed part of a single composite supply of services, as the principal element was the supply of photo processing services.

In the event that the FTT should find that there were supplies of goods, HMRC sought to argue that the goods must be standard-rated, as the UK 'standstill' zero-rating provisions must be construed narrowly and must not admit to zero-rating items which were not within the original scope of zero-rating.

The FTT first addressed the goods vs services question. Whilst agreeing with HMRC that the agreement with the IT provider labelled the supply as 'photo finishing services', the schedule identified supplies of both goods and services, as did the agreement with the retailer, and the FTT held that there were, in fact, supplies of both services and goods. That being the case, it was necessary for the FTT to consider whether those were separate supplies or elements of a single composite supply.

The FTT considered that the principal element in the supply was the finished photobook. It distinguished the ECJ's judgment in Levob Verzekeringen BV and another (C-41/04) on the basis that, in Levob, bespoke software was customised to such an extent that the supply of computer programming services was clearly the predominant supply. In the Appellant's case, the supply of services actually resulted in the creation of the goods, and the goods were, in the FTT's view, the principal element to which the services were ancillary. Consequently, the photobook constituted a single composite supply of goods. The FTT noted, in passing, that Notice 701/10 'Zero-rating of books etc.' states at para 7.1 that a service will be zero-rated where the service has produced new goods and those goods are themselves zero-rated.

The FTT then turned its attention to whether the various types of photobook fell within item 1 Group 5. It rejected HMRC's construction of the scope of zero-rating. The question was how the UK legislation was to be interpreted today, not how it was to be interpreted in 1991. Interpretation of the domestic law had to move to take into account commercial and technological changes, and if the goods were of a description falling within the scope of the zero-rating, that was how they must be treated. It would not be an extension of zero-rating to categorise photobooks as item 1 goods if that was their nature, it would merely be recognising the proper scope of the relief.

From the High Court's judgment in Colour Offset Limited [1995] STC 85 (QB), the FTT drew the principal characteristics of a book, i.e. consisting of a significant number of leaves, usually of paper, held together by front and back covers usually more substantial than the leaves and, along with these physical characteristics, meant to be read or looked at. 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, but a diary or address book would not qualify because it consisted of blank pages.

The FTT went on to apply these principles to the various type of photobook. Again, as the decisions are based on each type, the FTT's decision is reproduced here verbatim:

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."

With the exception of the two flipbooks, the appeal was allowed.

Comment

The FTT's decision is, of course, specific to the particular goods and associated services before it.

However, it will be of wider interest that the FTT rejected HMRC's attempt to confine the scope of relief by reference to what could have fallen within the scope of the standstill provision in 1991. The FTT comments that a standstill provision is not meant to 'stand still' in that sense: it maintains the relief which was in place in 1991, but does so by specifying the type of goods or services eligible for relief and rightly admits those which may have developed since but share the same essential characteristics as the specified goods or services.

Another example of this was the Advocate-General's opinion in Verigen Transplantation Service International AG (C-156/09), a case concerning medical procedures, where she commented that the list of exemptions was:

"in some ways a fossil from an earlier age – it was adopted in a social, economic and scientific context now some four decades old and has never been substantively amended. It may therefore be appropriate, when interpreting the wording of the exemption, to take account of situations which were not envisaged in 1977 – in terms of both medical progress and changing approaches to healthcare in the intervening years."

If you would like any advice on the issues raised in this case, please contact 4 Eyes Ltd.