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New Tax Laws Could Increase UK eBook Prices by as Much as 20%

Starting 5937492532_7d626bacd1_n[1]in January 2015, the UK is going to give consumers a good reason to learn how to use a VPN while buying content online.

The Guardian is reporting that the next budget for the UK includes a rather nasty clause that closes the Luxembourg tax loophole enjoyed by Apple, Google, Amazon, and other online sellers:

George Osborne’s latest budget could spell an end to 99p song downloads by closing a tax loophole that meant consumers were paying VAT at very low foreign rates on online purchases of books, music and apps.

The chancellor will bring in new laws making sure that internet downloads are taxed in the country where they are purchased, meaning web firms such as Amazon and Apple will have to charge the UK’s 20% rate of VAT. At the moment they are allowed to sell digital downloads through countries such as Luxembourg, where the tax rate is as low as 3%.

This should really come as no surprise. Remember, the European Commission announced in September that the EU tax laws on digital content would be changing by 2015. Today’s story merely reflects the UK complying with the new EU regulations.

Under the new rules, retailers are going to be required to collect VAT based on the location of the customer. The change will affect all retailers, but it’s only going to be a nuisance for online stores.

The old rule required retailers to collect based on their location. This encouraged some retailers to shift their digital operations to an EU member country which offered a lower VAT, thus enabling that retailer to have a slight competitive advantage. For example, Apple, Google, et al had been enjoying a Luxembourg tax loophole since that Duchy illegally lowered their VAT on digital content in December 2011. They dropped it to 3% from 15%, their regular VAT rate.

So how much will the ebook prices really increase?

At this point no one knows for sure, but the official estimates are suggesting that this move could add £300 million in tax revenues as retailers jack up prices.

But to be honest, I’m not sure Amazon is going to increase their prices. They do charge authors and publishers a delivery fee which is deducted from the 70% payment option, and that might be enough to balance out most of the extra taxes they will be required to collect. Sure, this might sting Amazon’s pocketbook, but it would also give them an advantage that will hurt their competitors even more.

The Guardian

image by me and the sysop


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fjtorres March 24, 2014 um 11:19 am

VAT taxes aren’t income taxes but rather consumption taxes. As such they are rolled downstream to consumers. The increased tax burden won’t be coming out of Amazon’s hide. They’ll keep on collecting their usual margin unless they want to squeeze Sony out of the UK, which is unlikely: odds are Sony will close up shop anyway. 😉

Robin March 24, 2014 um 11:42 am

I have always found it incomprehensible that if you buy a print book, newspaper, or magazine in the UK then although they attract VAT it is applied at zero rate whereas e-books and encyclopaedia (the latter on CD/DVD) attract VAT at the full 20%. I must admit though that I haven’t voted in elections since 1983 and then voted for the Raving Loony Party. Problem is they have formed the government ever since – they just change their party names.

Greg Strandberg March 24, 2014 um 4:52 pm

Well I sure hope Amazon sits back and sees how this unfolds before they make any changes. My Amazon books are starting to do better in the UK, and I’d rather not see that trend reverse itself.

Ebook Bargains UK March 25, 2014 um 5:18 am

Given Amazon’s current moves away from its charity-for-consumers image, as shareholders get increasingly restless about the business model, one wonders just how much Amazon will be inclined to absorb this.

Although we can reasonably expect Kindle UK market share to decline this year as Blinkbox goes live, Amazon has more than enough locked in custom to not have to worry about pushing up prices and, quite legitimately, blaming VAT. It’s not like the Kindle customers can defect to another retailer and easily take their collection with them – or even buy from other retailers if they have a Kindle e-reader.

All the UK-based retailers – Sainsbury, Waterstone’s, Hive, etc (and Blinkbox when they go live) – charge the standard VAT rate. Anyone who can afford an Apple device won’t be bothered by a few pence more on an ebook. Google might absorb the increase but is hardly going to have Kindle users defecting.

So long as the VAT is clearly labelled most Europeans will take it in their stride. VAT is a fact of life we live with every day.

The impact will be on indie authors who rely on cheap and cheerful pricing to balance their lack of brand recognition.

Amazon might choose to absorb the VAT on big name trad pubbed titles and on its own imprints where the margins and volume sales are significant, but hard to see them passing on that benefit to Joe Indie.

An indie pricing at £ 1.49 GBP title to get the 70% "royalty" will see the list price jump from about £1.55 with VAT to £1.80 with VAT.

For indies pricing at £2.99 GBP the prospect of a £3.60 list price will be daunting. Plenty of big-name ebooks in the UK stores at far less than that.

And even those indies going for the low-end readers will feel the pinch, having to price at £0.79 to keep the final list price below the magical one pound marker, and then collecting just £0.25 after delivery fees, meaning a real return on list price of just 25%.

Given the change is some nine months away the biggest impact may be in boosting digital libraries and subscription services, which by 2015 will be a lot better entrenched, and no doubt with a few new players on the scene.

The other impact will be in shoring up print sales, as print books are effectively exempt (0%) from VAT so the VAT increase will narrow the price gap between e-books and print-books.

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