Today’s budget will integrate an EU change in VAT on digital products and services. From 1st January 2015 VAT will be charged at the rate of the country that the BUYER not the SUPPLIER is based.
What does this mean to UK shoppers? It depends on what they are buying and where they are buying from. For example, the average price of an e-book from Amazon will increase by 57p. That’s because, at present, Amazon levies the 3% VAT from Luxembourg, where the digital product is supplied from, rather than the 20% UK rate. On the other hand, Apple’s Electronic Software Downloads are currently taxed at 23% as they come from Ireland. Whether Apple pass on the 3% VAT decrease to the UK customer remains to be seen.
‘Heads I win tails you lose’ sums up the industry’s likely response to these changes. However, in the short term the retailers that see their prices rise the most may not pass on all the VAT increase to customers, According to an Offcom report last year, the price the consumer is willing to pay for an e-book is £3.74 – but with 20% VAT the average e-book will cost £4.05. Retailers like Amazon may act to neutralise this increase, by dropping the net price – but it won’t be long before they gradually start putting their prices back up and regaining lost profitability.
Retail is renowned for being highly competitive. Retailers admit that they engage in unfair practices, but say they have to, if other retailers are doing it – a sort of race to the bottom of responsible business practices. Two years ago, the Low Value Consignment Relief (LVCR) from the Channel Islands was removed. Previously LVCR exempted products under £18 from VAT if they were shipped from Jersey etc. It wasn’t just the internet retailers that exploited this loophole. Lots of multiple high street retailers jumped on that unfair practice bandwagon, shipping DVDs and CDs through Jersey so they could undercut small and medium sized bricks and mortar retailers.
Will the levelling of the VAT playing field change shopping habits? I doubt it. For many digital products from many suppliers, the increase will be non-existent or so small rendering it almost unnoticeable. Even a 17% increase in an Amazon e-book will not change behaviour. Many of the best-selling e-books are already the same price as their physical counterparts but consumers still buy the digital version. That’s because they are buying convenience and instant gratification and/or space-saving benefits. Sometimes consumers want a physical product, they want to browse and enjoy the shopping experience. Many of those people that shop on the Internet also shop in-store, supporting the notion that an e-book is not a substitute for a ‘real’ book, undermining the argument that increasing VAT on digital products will encourage people to but physical ones again.
So what will this mean to the high street? No doubt the government will say they are acting decisively to reduce the unfair advantages exploited by internet retailers. But it is the EU that has forced this initiative – to reduce VAT discrepancies across the European Union, rather than intervene to help the high street. It comes too late for many high street retailers, especially the independents, who haven’t had the capital to adapt their business practices to exploit these loopholes.
The tax burden is still unfairly biased against the high street retailer based in the UK who cannot avoid corporation tax or get out of paying local taxes in the form of rates. VAT is a consumption tax – and so it’s not the internet retailer that carries this burden either – it’s you and me.