News - UK 99p digital downloads under threat as full VAT is to be applied

[HEXUS]

Companies such as Apple and Amazon will be affected by the UK Govt's £300M tax raid.

Read more.

[aidanjt]

"Public tolerance for those who do not pay their fair share evaporated long ago," said Osborne in his Budget speech.

That should be 'Public tolerance for stupid politicians evaporated long ago', georgey boy. VAT hikes come right out of the pockets of consumers, who'll be less prone to impulse buying more expensive downloads which clear the psychological 'it's nothing' £1 mark. Well done.

[wasabi]

While I don't like price increases, the current setup gives an unfair tax advantage to big multinationals over UK companies.

[CAT-THE-FIFTH]

Technology giants such as Apple and Amazon are currently able to pay minimal VAT charges when selling goods such as e-books, digital music, smartphone apps and games to British buyers from offices abroad, benefiting from a 3 per cent VAT rate rather than paying the standard 20 per cent rate if they were based in the UK.

It also means,that a lot of games might go up in price too by 20% and that might even include physical copies off Amazon and other games sellers too. A £35 triple A release might go upto £42 for example,or a £40 one to nearly £50.

It also will make Steam,or many of the digital game delivery services less attractive I suppose for buying games - it might mean people might actually save money!!

OTH,I have enough games I need to complete,and I will probably just go back to being more discerning about what I will buy(like in the past). It also means I might end up spending less which is probably a good thing. I found cheaper games made me spend much more in the last few years than say 8 years ago,and I don't complete as many of them.

[sykobee]

Not a surprise given Apple, Google and Amazon have been avoiding corporate tax. If you can't get the company to pay, then target someone who can pay - the buyer.

[shaithis]

I damn well hope that they are making sure the likes of starbucks also pay full VAT as part of this as saying they are closing a loophole is one thing, letting companies away without loopholes is another entirely!

[CAT-THE-FIFTH]

It looks like The Sunday Times article is not fully correct:

http://www.bbc.co.uk/news/technology-26716917

Digital downloads could be hit by price hikes early next year as they become subject to UK tax rates.

Currently download prices include a levy based on taxes in the country where a business is located.

Big web firms have sited offices in Luxembourg so they can charge at tax rates lower than the UK's 20% VAT.

Closing the loophole could bring in revenues of about £300m in its first year, according to government estimates.

The tax change will apply to downloads of films, music, e-books and smartphone games.

Chancellor George Osborne mentioned the plan to change rates in his Budget speech last week. The plan was first set out in the government's Finance Bill and the change will come into force on 1 January 2015.

The change is part of a wider European Union push to ensure taxes are levied in the country where goods and services are consumed rather than where a business has its head office.

Music, book and smartphone game downloads are likely to be affected by the change as the UK VAT rate of 20% on those goods is higher than those in Luxembourg where music, film and game downloads have a 15% tax rate and e-books 3%.

In total, about 34,000 firms will be affected by the change, estimates the Office for Budget Responsibility.

However, the tax switch is likely to have the greatest impact on purchases made via Amazon's web store and Apple's iTunes. It is not clear yet whether the change will mean an increase in prices. Neither Apple nor Amazon has commented on the news.

So it appears smartphone games are affected not normal games,and moreover outside e-books the VAT was already at 15% in Luxembourg.

[crossy]

So it appears smartphone games are affected not normal games,and moreover outside e-books the VAT was already at 15% in Luxembourg.

Thanks for this Cat - so far from being an apocalypitical money grab by Osburk, it's just a small hike? Actually are any of the companies - Steam, Amazon, etc - paying 0% in which case it would be a big hit?

I'm not a big fan of digital download music - only got a small collection obtained that way - but a 5% hike in the cost of Steam, Origin, etc would be something that would worry me. And as for a 15% hike (although I know it's not that much thanks to you) would really hurt.

I wonder what they're going to do about the smaller sellers - e.g. I've bought eBooks from Baen in the US, and O'Reilly?

[peterb]

I damn well hope that they are making sure the likes of starbucks also pay full VAT as part of this as saying they are closing a loophole is one thing, letting companies away without loopholes is another entirely!

Starbucks and other VAT registered entities don't pay VAT anyway - VAT is purely an end user (consumer) tax, collected by the VAT registered entity on behalf of the Government.

[scaryjim]

... Actually are any of the companies - Steam, Amazon, etc - paying 0% in which case it would be a big hit.

Even if they were, I'm pretty sure they'd choose to take on the additional VAT cost themselves (most of which they can almost certainly account away) rather than risk losing sales. It's not like they'd have to take a big hit to keep charging 99p for those downloads. And if they're already levying 15% VAT on the sales, it's negligible to soak up an extra 5%.

Once again a fairly minor story is made to sound bigger than it is due to the complexity of our existing tax system...

[Saracen]

I damn well hope that they are making sure the likes of starbucks also pay full VAT as part of this as saying they are closing a loophole is one thing, letting companies away without loopholes is another entirely!

It's all part of a program designed to do exactly that, and by the way, for earlier references in this thread to it being an "Osborne grab", it's an EU-wide program being implemented, which has been part of the outcome of a major attempt to reform the way aggressive tax avoidance is dealt with, done by the G8, G20 and OECD.

The principle is pretty simple - tax should be levied in jurisdictions where economic activity takes place, without giving undue weight to either transfer pricing or IP rights. And that, of course, includes Starbucks, Amazon, etc.

It's also designed to deal with companies having pseudo-operations in low tax countries, where there is basically no economic activity, no employment, etc. That is, a shell company, a plaque on the door and not much else beyond a LOT of money flowing in and out, at least on paper, in what boils down to legalised money-laundering purely for tax purposes.

The whole thing has to be done carefully, because it's being done in most major countries simultaneously, and it has to be done within existing frameworks, and in a way with broad concensus. For instance, VAT as a consumption tax is a prerogative reserved to Member states of the EU but within broad parameters (it cannot be discriminatory) etc. So, the broad context within the EU is EU mandated, most product categories are mandated to be within specified ranges of tax rates, but some 'exceptions' are entirely national issues, as is the exact rate within those ranges.

Also, the principle of tax levied where economic activity takes place still has to be consistent with other legislative boundaries, like 100 or more double taxation agreements, and the WTO GATT framework.

Anyway, the point is that this measure on games, etc, is part of far more wide-ranging agreement designed to ensure taxation reflects economic activity.

In the case of VAT, as a consumption tax, that implies the economic activity is consumption, and so the consumption tax regime (VAT in the EU, state and federal taxes in the US, and so on) depends on where the consumption takes place, NOT where some notional, legalistic, non-operational 'office' has been created purely for tax purposes.

For corporation tax, however, the economic activity is profit-making, not either sales or revenue. And THAT is where rules on not giving undue weight to IP rights comes in. For instance, Google and Starbacks may well be treated very differently. Google can make a good case that a large part of the value comes from IP, from software, from search design, etc, developed largely in the US. A cup of coffee, on the other hand, is only dependent in small part on either coffee beans, or 'branding', and far more about premises, serving and cleaning staff, physical premises, and so on. So .... the ability to argue IP rights as a basis for transfer pricing is MUCH lower .... IMHO, of course.

I find it .... amusing .... that a few months ago, lots of steam was being let off here about corporate tax avoidance (with justification), but when many national governments get together to combat that, lots of the hot air is about individuals actually having to pay a bit more tax.

These measures are designed to stop all sorts of forms of tax avoidance, including nominally locating in specific jurisdictions because it offers tax avoidance opportunities.

We are, therefore, now getting precisely what loads of people here, and all over the country, and in the media, have been ranting about, which is measures designed, within international frameworks, to combat aggressive corporate tax avoidance, and to apply the same principles within the digital economy that already broadly apply outside it, which is that taxation occurs where economic activity occurs.

[cjs150]

Despite all the comment on the budget the fact is that the change was agreed at EU level a long time ago and comes into effect on 1 Jan 2015. How this will be monitored is a big issue. If I order a download whilst in Spain but the download is to my UK home server should VAT be paid to UK or Spain?

Ultimately the problem is where really is the economic activity being carried out? Is it the place where the download is received or where it is sent. If the activity is where the download is sent from then that is where it should be taxed.

In any event this will only work on trade within the EU. HMRC has no ability to charge tax to a company based in Brazil with no premises or people in the UK who is simply providing downloads unless Brazil law specifically allows HMRC to enforce a claim for payment there (not all countries do)

[jim]

Despite all the comment on the budget the fact is that the change was agreed at EU level a long time ago and comes into effect on 1 Jan 2015. How this will be monitored is a big issue. If I order a download whilst in Spain but the download is to my UK home server should VAT be paid to UK or Spain?

Ultimately the problem is where really is the economic activity being carried out? Is it the place where the download is received or where it is sent. If the activity is where the download is sent from then that is where it should be taxed.

In any event this will only work on trade within the EU. HMRC has no ability to charge tax to a company based in Brazil with no premises or people in the UK who is simply providing downloads unless Brazil law specifically allows HMRC to enforce a claim for payment there (not all countries do)

But they do have the ability to charge tax to a person purchasing goods from outside the EU - customs duty/import VAT. I don't know if that applies to digital goods, though.

[cjs150]

Jim: customs duty is a very old tax and still applicable to goods shipped to UK you will often seen customs officers checking shipments and shipping manifest at ports for exactly that reason. The problem is that on digital delivery that sort of checking process is nigh on impossible - unless you are the NSA, and it still would not help if the digital download was to a cloud server based (for example) in Ireland but used by UK customers

[MrJim]

I find it .... amusing .... that a few months ago, lots of steam was being let off here about corporate tax avoidance (with justification), but when many national governments get together to combat that, lots of the hot air is about individuals actually having to pay a bit more tax.

Wasn't that rant about how little corporation tax those companies were paying? This is a whole different rant! VAT is paid by the consumer, not the retailer.

The situation with ebooks is particularly irritating for me, since paper books are VAT free. It seems ridiculous that sometimes charge more for the eBook than its printed counterpart, when ebooks are inherently cheaper to supply & distribute.

[TheAnimus]

VAT hikes come right out of the pockets of consumers, who'll be less prone to impulse buying more expensive downloads which clear the psychological 'it's nothing' £1 mark. Well done.

Any tax rise comes out of the pocket of consumption, as it creates an inefficiency thus making it more expensive.