'Package Rule' is a taxing issue

You spot the prices, we ask the questions: Last week we carried a piece on the Vat rate imposed on magazines which routinely give away free gifts, after a reader contacted us having been charged €4.24 for a magazine called Horrible Science which had a cover price of €3.50.

She had been told there was "some new tax on magazines where there was an item free". When we contacted the Revenue Commissioners to find out about this new levy, a spokesman said that no new tax had been imposed on magazines in recent years and the 21 per cent Vat rate had applied since the 1970s.

Another reader has been in touch challenging this position. "Yes, this is probably an old tax," Mark Crowther writes, "but it has only been applied in this way since the last budget. As I doubt that Minister Cowen targeted these magazines in the budget, I can only assume that this was yet another 'stealth tax' identified by the civil servants."

To find out exactly what was going on we got in touch with Eason's, one of the wholesalers who distribute the magazine in the Republic. A spokesman confirmed that while no new legislation had been introduced, there had been a change in interpretation of existing legislation which had adversely affected the Vat rate imposed on Horrible Science, among other magazines.

In the 1970s part works magazines tended to be simple affairs with titles such as The 100 Greatest Artists, The World At War or Tall Ships of the World. There would be a set number of issues which could be collected and turned into books, with the help of free binders.

Because they were regarded as books, the Vat rate was zero. Magazines, meanwhile, attracted Vat of 13.5 per cent, while toys had a rate of 21 per cent. In recent years such magazines have grown more sophisticated and give away toys, DVDs, CDs and - on one occasion - a model of the Titanic which had to be assembled in 120 weekly parts. Up until January 1st, 2006 many such magazines still did not attract Vat as the issues could be collected to form books.

But since the beginning of the year, the Revenue Commissioners has more vigorously applied the "Package Rule". This rule states that if a magazine has a pre-determined number of issues, comes with a free binder and has no freebie or one worth less than 40 cent, then no Vat is applied. If, however, the magazine has a predetermined number of issues, comes with a free binder but has a gift which is worth more than 40 cent, then the Vat rate climbs to 21 per cent. This explains why Horrible Science - a children's magazine with considerable educational value - is incurring the high rate of Vat.

We contacted Revenue again to find out more about this new interpretation and were told that since Vat was "a self-assessment tax", suppliers needed to apply "rules which are appropriate to the particular items". A spokesman went on to say that "in the context of giving guidance [ to magazine wholesalers] during 2005 on the practical application of these rules, Revenue agreed an approach with them which was to be used with effect from January 1st, 2006."

The Revenue spokesman added that the recently published Finance Bill includes proposals for new Vat rules. If a toy is supplied with a magazine then the relative value of each element will have to be worked out before Vat. This should mean that prices will fall, as the 21 per cent rate will not apply to the magazine, just the toy.