Doh! Customs gives Homer a tax headache

The decision by the independent VAT tribunal requiring BSkyB tothe rest of the industry worried about Customs’ next move. continue paying VAT on its satellite TV guide last week, has sent a shudder through the publishing industry. The verdict will cost the company ?m a year and – with cable and satellite TV guides now big business, to say nothing of other magazines provided to members of motoring organisations as part of a service – other publishers fear they could be hit.

The principles in the BSkyB stand-off are simple. The TV guide SkyView used to enjoy a zero VAT rating, in line with magazines and other printed publications until a Customs & Excise ruling in May 1998 forced the company to pay the standard 17.5% VAT rate.

BSkyB argued, unsuccessfully, the guide was a separate supply to its TV channels, although it was included in the monthly subscription.

At the tribunal Customs saw it differently. It argued the magazine is bundled into the entertainment supply and, as it was not a separate service, it should have been subject to the standard VAT rate of 17.5%. Customers, Customs officials argued, do not have the choice not to take the TV guide and get a reduced subscription.

Customs says only 501 BSkyB TV guides had been sold outside the subscription service for the one year ending June 1997. ‘Without the subscription service the magazine would not exist,’ it says.

BSkyB insists it will have to pay around £20m in VAT per year on its TV guide SkyView. The guide is available free to subscribers and has a nominal cover price of £3.25. BSkyB has also launched a digital TV version of SkyView which has around one million subscribers and is also subject to VAT, though its cover price is £2.15.

It is a galling defeat for BSkyB, which owns 12 UK television channels and is part of Rupert Murdoch’s News International empire. Last October, it launched the first UK digital television service – Sky Digital. As well as offering film channels, the services attract subscribers with the latest series of US imports such as ‘Friends’, as well as ‘Sky News’, longstanding shows such as ‘The Simpsons’ and new additions like Barry Norman’s film programme.

To say tax is a sore spot for the broadcaster is an understatement. Its third-quarter results showed pre-tax profit down to £16m from £74.7m the previous year, and this profit fall was linked to the VAT charge on its TV guide. At least initial fears of a £50m VAT charge have proved unfounded: around three million of BSkyB’s seven million subscribers receive the service through cable and receive a separate cable guide, reducing the potential bill.

In recent years, BSkyB has also raised eyebrows for the low rate of corporation tax it pays to the Inland Revenue. Last year, it paid just over 8% in tax, compared to the 31% standard corporation tax rate. But the tax implications of BSkyB’s case reach far outside the confines of News International.

Some in the publishing industry already view the decision as the beginning of the end for the zero VAT rating on magazines and printed materials.

The companies most obviously in the firing line are cable TV providers like Cable & Wireless, which has over 800,000 subscribers, and provides a free guide through its subscription.

The AA, which successfully fought Customs in the mid-1970s to keep its free handbook for members zero-rated, will also be closely following the twists and turns of the BSkyB tax dispute. Until now, the AA dispute has been seen as a landmark case, enshrining the VAT exemption of magazines through subscriptions. Predictably the companies involved are tight-lipped about the VAT status of their magazines.

But this tax grey area has not stopped other organisations planning similar guides. Channel Four, for instance, is talking to publishers about providing a free magazine guide to subscribers of its digital film channel, Film Four.

Ironically, one of the publishers Film Four is talking to, Redwood Publishing, is responsible for the BSkyB guide.

Tax experts believe the BSkyB decision breaks new ground. ‘There’s a very long-standing tax concept that if you pay a subscription and get printed matter then it will be zero-rated,’ says Richard Watson a VAT partner at PricewaterhouseCoopers. ‘It could be a landmark case.’

Others suggest BSkyB’s case could prompt a clampdown on similar TV guides.

‘The issue is whether it’s one supply or multiple,’ says Peter Jenkins, indirect tax partner at Ernst & Young. ‘It does seem to go against the idea that subscription magazines are allowed to be zero-rated. Customs fears it will become a VAT-avoidance scheme.’

The battle is not over yet, however. The verdict has yet to be published and the company is understood to be seeking an amendment to its wording.

BSkyB also has 55 days to appeal against the decision and has previously said it is prepared to fight the government all the way to the High Court.

Tax experts warn the tribunal verdict raises more questions than it answers.

‘It puts any guides of that nature at risk,’ says the finance director of a leading publishing company. ‘The magazines, like BSkyB’s TV guide, are a fantastic wheeze because they are self-funding and in theory you make a profit.’

With some justification tax experts and other cable companies fear a clampdown on subscription magazines. Subscribers may legitimately fear their subscriptions could rise to meet additional VAT costs.

And while the message from Customs is that BSkyB is a special case abusing zero-VAT rating magazines, the boom in cable, satellite and digital services means Customs may find itself on a collision course with more broadcasting companies.