Law 2.0 – Is the law struggling to keep up with technology?

06 Apr 2018

Two recent court decisions (one a tax dispute over VAT, and the other involving the Commercial Agents Regulations) have highlighted how certain areas of the law are struggling to keep up with advances in technology, and in particular, the ways in which “goods” are increasingly being distributed digitally.  This is already causing significant practical and financial issues for business which use digital media to supply goods which had historically been physically distributed.

What is the legal status of computer software?

It has long been established under English law that computer software supplied in a tangible medium (e.g. on physical discs) will be considered as “goods” rather than “services”.  This has a number of significant legal consequences; for example, the Sale of Goods Act 1979 and the Commercial Agents Regulations 1993 only apply to “goods” and not “services”.

But when was the last time you purchased software on physical discs?  In reality, there has been a fundamental shift in the last 5-10 years in the way in which software is distributed, and today the majority of software is sold as digital downloads rather than as a physical box of discs to be manually installed.  But what is the legal status of such software?

In the case of Computer Associates UK Ltd v The Software Incubator Ltd, the Agent (The Software Incubator Ltd) attempted to bring a claim under the Commercial Agents Regulations (CARs) against the Principal (Computer Associates UK Ltd).  However, the Principal argued that because the software in question was delivered via an email link to a download (rather than on physical discs), the software was not “goods” and the CARs did not apply.  The High Court judge disagreed with that argument, and ruled that the downloadable software was still “goods” for the purposes of the CARs, which should therefore apply.

However, the Principal appealed to the Court of Appeal, which then reversed the earlier High Court decision.  Having considered all of the relevant law on the subject, the Court of Appeal ruled unanimously that “intangible” software (software that was delivered electronically and not on any tangible, physical medium) could not be considered “goods”, and so the CARs did not apply.  The Court of Appeal acknowledged that it was arguably illogical to make the legal status of software entirely dependent on its medium of delivery, but stated that the current law was clear, and so any change to the law would need to come from parliament rather than the courts (which is precisely what had already happened in Australia and New Zealand).  Of course, with the UK law-makers likely to be busy for years to come dealing with Brexit-related issues, it is unlikely that the law in this area will be updated any time soon to reflect current technological practices.

As a result, the legal status of computer software (at least in a business-to-business context) will continue to be arbitrarily decided by the way in which the software is distributed.  If the same software in this case had been distributed to another party via an email link to a download, but “back-up” discs had also been provided on a tangible medium, then that software could presumably have been considered to be “goods” and the CARs could have applied.  This scenario highlights how the law is failing to keep up to date with the realities of modern digital commerce.

What is the legal status of digital newspapers?

In a similar vein, the First Tier Tax Tribunal recently ruled in the case of News Corp UK & Ireland Ltd v HMRC that although physical newspapers were “zero-rated” for VAT purposes, the identical digital versions of the newspapers were not.  Once again, the distinction hinged on whether or not the digital versions were “goods”, as the Tribunal was prepared to accept that the digital versions were still “newspapers”, but concluded that the relevant section of the Value Added Tax Act 1994 only applied to the supply of “goods” (whereas the digital versions of the newspapers constituted a “supply of services”).

This is another example of an item’s legal status being determined solely by its medium of delivery (i.e. whether as a printed newspaper or as an identical digital newspaper).  Given that sales of print newspapers have been falling for years, digital newspapers are likely to represent an increasing share of total newspaper sales, suggesting that the law in relation to the tax treatment of digital newspapers urgently needs to be updated to keep pace with the current technological practices.

What this means for businesses supplying digital content

These cases are just two recent examples of areas where the law is falling behind everyday technological realities.  While there have been some attempts to address the “supply of digital content” in the context of consumer rights, there is still a long way to go, and in the meantime, businesses need to be aware that differences in the medium used to deliver their products might be the deciding factor in determining their legal status.

If you would like to know more about these or any other issues relating to commercial agency or tax disputes, please contact Michael Axe today for more information.

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