JAN FEB THE COMPUTER LAW AND St:~CURITY REPORT 11990-9l I 5 CLSR

MDC is an indispensable condition for the reliability of the system. Professor Y. Poullet Professor at the Law Faculty of Namur (Belgium) Director of the Centre de Recherches Informatiques et Droit

M.H. Boulanger Assistant at the CRID

We would like to thank here Doctor Karl Furmaniak for the precious help he gave use for this analysis. We also thank Professor Andre ~ Bouckaert for his practically oriented contribution.

INFORMATION TAXATION

CUSTOMS A N D VAT TREATMENT OF SOFTWARE - A NOTE Although Customs duties and value added tax are both the responsibility of H M Customs, and although the Value Added Tax Act 1983 provides that "tax on the importation of goods shall be charged and payable as if it were a duty of customs" (S2(4)VATA) it would be quite unsafe to assume that the principles on which they are levied are the same. They differ widely., particularly in the case of computer software. In relation to any importation of software the questions which need to be asked are as follows:- (i) can customs duties (or VAT) be levied on this

importation at all? (ii) if so, what is the customs or VAT base on which that

assessment can be made? Crucial points to remember are that while customs duty is payable on importation of goods into the European Community, value added tax is payable both on importation of goods and services into the United Kingdom and on supplies made within the United Kingdom. The principle that customs duties applied only to goods gives rise to the central complexity of classifying software for customs purposes. Although integrated circuits have their own tariff heading for customs purposes, software does not. Following a GAFF decision in 1985 the value of data encoded on magnetic media is not to be taken into account in calculating the duty payable on importation, provided it is possible to distinguish the relative values of the two. In practice, this means showing separately the value of the dutiable items as well as the total value. It should also be noted that the customs base will include royalties and licence fees, where these are payable as a condition of sale of the goods being valued, and are quantifiable at the time of importation. These do not include charges for the right to reproduce the imported goods in the Community. Accordingly, although the value of data per se is not dutiable, it is possible that the customs base selected will reflect the licence fee paid in respect of that software. It appears to follow from the above that a wholly electronic cross-border transfer of software not embodied in a carrier medium will not amount to an importation of goods for customs purposes though it almost certainly would

constitute an importation of services for VAT purposes. A crucial distinction for VAT purposes, but which seems to have no significance for customs, is that between off- the-shelf and custom-made software. Everything except packages which are freely available and usable in a standard form falls within the "custom-made" classification. It is, however, the time of importation which counts for this, so the importation of standard packages for the purpose of customising them will be an importation of goods for VAT purposes. VAT will be charged on the full value of the goods imported, which includes the value of the programs. However this value should not include licence fees, which will be treated as separate supplies of services and require accounting treatment as outlined below. The importation of custom-made software is treated as an importation of services for VAT. This means that software importation will generally fall within the scope of the reverse charge. Importers must account for value added tax as though they had both made a supply to themselves and received a supply of the same value. This reverse charge should present merely accounting difficulties in the majority of cases. However, where the importer's business involves making substantial exempt supplies it will not be possible to claim the full amount of the input tax on the supply received against the output tax owing in respect of the deemed supply made by the importer. This is likely principally to affect financial institutions on the import of financial software. The incidental importation of goods - in the form of the carrier medium on which custom-made software is carried - will be disregarded for VAT purposes. Since a substantial percentage of the software used in this country is imported from outside the EC it is necessary to be aware of and apply the relevant rules as necessary. This is particularly pressing in view of the extensive compliance duties placed on the importer, the severity of the penalties for failure to comply, and the extensive powers of Customs to investigate suspected non-compliance. As ever in matters of taxation, accurate and meticulously kept accounting records are vital.

Susan Hall Solicitor Baker and McKenzie (London)

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