HCR Law Events

6 January 2022

Goods or services? The impact of a recent case on software resellers

The European Court of Justice has ruled in the case of The Software Incubator Ltd v Computer Associates UK Ltd, that there is a ‘sale of goods’ when software is supplied for a fee by electronic means and is accompanied by a perpetual licence to use it.

The CJEU decision is binding on the Supreme Court and is a significant decision for both software resellers who, as commercial agents, will be entitled to the protections and benefits of the Commercial Agents (Council Directive) Regulations 1993 SI 1993/3053 (the Regulations) irrespective of the medium on which the software is transferred to their customers.

It is also significant for businesses who, as principals, engage resellers as a method of distributing software primarily made available electronically.

Both should take steps to quantify their potential exposure to the compensation payments that can be due on termination of an agency relationship under the Regulations.

Computer Associates was marketing application service automation software for deploying and managing applications across a data centre. They used electronic means to grant customers software licences, entered into an agreement with The Software Incubator on 25 March 2013 and later in 2013, terminated The Software Incubator agreement.

The Software Incubator sought damages under the Regulations; Computer Associates disputed its relationship was a commercial agency contract.

The High Court found the “sale of goods” included the supply of software, The Court of Appeal disagreed, and held that the supply of software in the form of a download is not a sale of goods. The Supreme Court requested a preliminary ruling from the CJEU.

The CJEU’s ruling clarifies the meaning of:

  • Goods, meaning products which can be valued in money and are capable of forming the subject of commercial transactions. As software has a commercial value and can form the subject of a commercial transaction, it can be classified as “goods”, irrespective of whether it is supplied by electronic download.
  • Sale, an agreement whereby a person, in return for payment, transfers their ownership rights in an item of tangible or intangible property.

Downloading a computer program, and concluding a user licence agreement for its use, form an indivisible whole; the download is pointless if the program cannot be used. Accordingly, making computer software available by way of download and concluding a user licence agreement with the customer for its permanent use, in return for a fee, involved a transfer of ownership.

The CJEU also held the effectiveness of the protection granted by the Directive to commercial agents (under the Regulations) would be undermined if supplies of software by electronic download was excluded from the concept of “sale of goods”.

In practical terms the effects of the decision are significant for distribution arrangements of software, with particular focus on software supplied either as a download or as a Saas (software as a service) solution.

Previously, only software sold on a disc or bundled within hardware was deemed to be a “sale of goods”. Electronic downloads or streaming of software was held to be the provision of a service. This is a significant distinction when applying the Regulations. These provide financial compensation at the end of an agency arrangement, and therefore a degree of protection to the otherwise potentially precarious status of a commercial agent appointed to distribute goods on behalf of their principal.

In the world of software distribution, an agent appointed to distribute Saas or downloadable software licences could not previously rely on the Regulations for protection or compensation, as their distribution was in relation to a service, which the Regulations do not protect.

Following this decision by the Supreme Court, this group of distributors can now rely on the Regulations to claim compensation when their agency terminates, whether simply at the end of a fixed term appointment, whether at the will of their principal, whether on retirement or even death.

In fact, the agent can rely on the Regulations to receive compensation in all cases unless the principal can show a clear breach of the agency agreement by the distribution agent.

The compensation afforded is to reflect the value of the agency to a “hypothetical buyer” were the agency to continue; the value of the compensation relates to the income generated by the agent.

There are various methodologies for the calculation of the amount of compensation due, which take into account previous earnings and predicted future earnings as well as the risk/ certainty of those future earnings.

This change in status, from a distribution agent for services to the more protected position of distribution agent for goods, clearly benefits agents and may prove onerous to the principals. Principals should be aware of these changes and consider whether the agency format for distribution of downloadable or Saas software solutions remain the appropriate one, bearing in mind the compensation at termination.

Likely VAT implications of the Software Incubator Ltd case

Implications of this ruling for VAT are not as significant as they may at first seem. For a transaction to be within the scope of VAT, it must be:

  • a supply of goods or services
  • supplied in the UK
  • made by a taxable person in the course or furtherance of any business they carry out.

Supply is not defined in the VAT legislation and case law shows that it has a broad meaning and includes anything done for a consideration.

Further, the VAT legislation is constructed so that, generally, whenever a taxable person transfers goods there will be a supply, irrespective of whether consideration is given. (In contrast, generally, the provision of services for no consideration will not be a supply, except in limited circumstances.)

An essential element of a supply is that there must be a direct link between the goods or services supplied and the consideration received. Anything that is not a supply of goods but is done for a consideration (including, the granting, assignment or surrender of any right) is a supply of services.

Goods, for VAT purposes, are concerned with tangible property (physical objects). In The Software Incubator Ltd, the Advocate General argued the interpretation of the notion of ‘goods’ in other fields of EU law did not invalidate his analysis. His analysis does not invalidate the notion of goods in other fields, including VAT.

In the judgment, the Advocate General states that in the context of EU measures on the VAT regime, the term ‘supply of goods’ is expressly limited to tangible property. Digital products, including computer software, supplied on an intangible medium are classified as a supply of services, whereas such products supplied on a tangible medium are classified as a supply of goods.

The judgment makes clear that this case is contextually and conceptually different to the VAT arena and should not alter the present VAT regime – for VAT purposes the term ‘goods’ remains limited to tangible property, and computer software supplied by intangible means remains a service.


This ruling, effectively reclassifying software delivered electronically, as a download or by real time streaming services, means that principals using agency agreements for the distribution of their software should carefully consider the impact of the Regulations and the compensation payment that will arise at the end of an agency agreement.

The Advocate General has made it clear that this case is contextually and conceptually different to the VAT arena. Accordingly, this case should not alter the present VAT regime. The term ‘goods’ will remain limited to tangible property and computer software supplied by intangible means will not.

There is no evidence to suggest that The Software Incubator Ltd v Computer Associates UK Ltd has any effect on any other area of tax. The case is confined to its facts and effects commercial agents, specifically resellers of software and businesses working with them.

Share this article on social media

About the Author
Sarah Woodall, Head of Tax, Partner (Barrister)

view my profile email me

Want news direct to you?

sign up

Drop-in sessions for In-House Lawyers

find out more

Got a question?

Send us an email

Newsletter HCR featured image

Stay up to date

with our recent news