Contentious VAT On Ebooks
October 28th, 2012
by Gwyn Headley
Managing Director
Tags: 3G, accountants, Amazon, American, Apple, bandwidth, Berwin Leighton Paisner, BLP, British publishing industry, broadband, City, clients, digital publishing, drive prices down, ebooks, Europe, fiscal neutrality, Foyles, gilt-edged, Government, greater good, Heritage Ebooks, HMRC, illustrated ebooks, KFC, law, lawyers, losing, Luxembourg, Macdonalds, photographers, picture libraries, Printed books, pro bono, Publishers, raise prices, standard-rated, Starbucks, tax, Tesco, UK, VAT, Waterstones, zero-rated
Printed books are zero-rated for VAT in the UK. Ebooks are taxed at 20%.
Publishers have taken a softly-softly approach to VAT on ebooks, fearful that if they kick up too much of a fuss the Government will awaken to the fact that printed books are presently zero-rated and slap 20% on them overnight.
Such a move would decimate the British publishing industry — and by extension picture libraries, photographers and all the industry’s ancillary suppliers would take a huge hit. It’s therefore unlikely to happen, but who can predict what a politician may take into his head to do.
City law firm Berwin Leighton Paisner has announced on its website:
“VAT treatment of ebooks – The firm is taking a groundbreaking case challenging HMRC’s view that ebooks are standard-rated for VAT purposes, in contrast with physical books which are zero-rated.”
Hard-nosed commercial firms like BLP do not take cases on pro bono, or challenge national or international law simply for the greater good. Therefore they’re doing this for one of their clients, and that client will have deep, deep pockets.
Who can it be? Who will benefit?
Well, the consumer will benefit if prices fall by 20% (they won’t). Publishers will benefit from a boost in sales.
But by far the biggest beneficiaries will be the retailers. Apple sells ebooks. Tesco sells ebooks. They will both see a hike in profits. BLP numbers Apple and Tesco among its gilt-edged list of clients.
Our digital publishing company Heritage Ebooks sells 50 illustrated ebooks from its site for every one ebook sold by the rest of the UK’s ebook sales outlets — Waterstones, Foyles, Tescos and so on — put together.
And for every one of our ebooks that we sell from our site, Amazon will sell twelve from theirs.
It is disproportionately huge. OK, so we’re tiddlers, microbes even, but I expect the proportions are similar whatever you publish.
Amazon has been subject to much opprobrium and contumely for selling ebooks to UK customers and charging the full 20% VAT while taking advantage of the 3% VAT they pay as a company based in Luxembourg. Like Starbucks, Macdonalds and KFC, large American companies have an aversion to paying their fair share of tax in Europe, and as their lawyers and accountants are sharper than ours, they can get away with it.
And now some organisation, through BLP, is challenging HMRC’s ruling on the grounds that charging different rates of VAT on print books and ebooks breaches EU law on fiscal neutrality.
Come on, this has to be Amazon. Who else could afford such a suit? And who else would profit more?
Amazon charge us, the publisher, for the bandwidth used when a customer buys and downloads a Heritage Ebook from them. Because our ebooks are highly illustrated, they have large filesizes and therefore incur high bandwidth usage fees. And because one or two books are downloaded via 3G rather than broadband, Amazon charges us across the board at mobile phone companies’ bandwidth fees.
The result is that for two of our titles, we are losing 10p on every sale made through Amazon because of their charges. Amazon are thereby forcing us to raise our prices.
And I thought their intention was to drive prices down.
The Govt wants the money; large companies would prefer to have that money in their back pocket. Big businesses (whoever they may be) will doubtless be able to persuade consumers that it is in their interest for the VAT to be dropped, helping prices remain low for e-books.
Amazon have already made it clear that they are not making a profit on the e-book/tablet hardware they sell. I am sure that many publishers have voiced their opinions to retailers on the paltry returns that they currently receive from e-book sales, and that (probably) the only way to increase that revenue is to increase sales, as the current economic climate doubtless makes the customer highly resistant to price hikes.
I have no doubt that Amazon and others are preparing for a clampdown on tax avoidance here, and that big businesses such as Amazon are getting ready for a big hike in what they have to pay to the Govt. They are surely looking for any way to claw back some of that cash. Increased sales and revenue is one of the options – if prices increase then sales will just stagnate.
Quiet words (and unveiled threats) will probably be whispered in shady corridors that an ease of the this VAT rate will aid the business to stay here rather than move other areas of its business beyond our borders. You scratch my back…
With the current state of the economy, it is surely in the interests of Govt to retain – and build – on the growth of such business. Any way to raise the number of people employed in the depots delivering the products they sell.
Relating to Heritage Ebooks: as an individual supplier, far too small – Amazon probably don’t give a t**s. On a larger scale however, through conversations with the big boys, they will know the damage that small, zero or negative returns is having on their suppliers overall, and that has to be a concern for them: if they begin to lose their suppliers, then they ain’t got nothin’ to sell. They surely know that suppliers want to increase prices, in order to make some money, but fear that consumers will cease to buy if the prices go up too much in these tender times.
It’s in everyone’s interest to lower/remove this VAT rate. The only exception of course, being the Govt, who are only looking as far as the next election, and want to get as much cash in short-term as possible. The long-term damage has yet to be seen.
Oh, and is it not possible that this may well be a combined effort by multiple players?
Good points, well put. As far as Amazon not giving a toss about Heritage Ebooks, in the US they only talk to the big six publishers and the rest simply obey the decisions that are passed down. Amazon are unaware of Heritage Ebooks!
A combined effort by multiple players? It would be like herding cats. And I think news might have leaked out.
Amazon are seeking to dominate the publishing market next. Vertical integration.. The fact is that you (and me) can’t win against them – all we can do is to try and work their system to our advantage.
But to give Amazon credit — less than 20 years ago Jeff Bezos was going cap in hand to publishers to plead for credit terms. Amazon who? they were saying.
So-called E=books are completely different from books. Books have pages, are made of paper, can be given to other [opeople etc. Both books and so-called e-books are simply medium for transmission of information. The sooner we drop the suffix ‘books’ from these electronic gadgets the better. They are NOT books and there is no reason at all why they should be compared with books.
The whole point about the zero-rating of books is that they are printed material and like most other prnted material are zero-rated because they are printed. So-called ebooks are NOT printed and that is why they are not zero-rated.
David, I disagree. If you look at a printed book through digital eyes, the author’s words are the software, and the print, paper and binding are the hardware, or the device.
Content is king. An ebook to my mind is simply another method of delivering the content, like a hardback and a paperback of the same title.
Thatcher was apparently thinking of charging VAT to books during her reign. Her “reasoning” being that whilst books are exempt from VAT because they are educational, nevertheless, almost all of the big sellers were entertainment style books: Jackie Collins and the like. Not really educational.
However, when it became apparent that newspapers would incur this VAT charge, too, the Murdochs of this world used their considerable clout.
Hence the Status Quo, which I think will prevail.
In yesterday’s Sunday Times (a Murdoch paper) we read of “Murdoch’s £1bn bid to scupper Penguin deal” — the proposed ‘merger’ between Pearson and Bertelsmann, known as Penguin and Random House to the consumer.
So I think you may be right, Brian.
eBooks are green-books, require little raw materials our European Governments should continue to support ZERO rated VAT for the same good reasons as they did for the printed book. Mr Martin Luther’s printed word helped to free-up people’s collective knowledge for the common good to society.
Our Mr Alan Turings of this world may turn in their graves 20% VAT will be charged for eBooks, MUST NOT HAPPEN. This is the only knowledge area that is targeted, we pay enough for education, eBooks are our future mind skills, we must protect societies only asset by ZERO RATE eBOOKS – NO TAX ON EDUCATING OUR MIND SKILLS.
Mike, it is happening. Ebooks have had 20% VAT slapped on them from the start.
Thinking of all those massive air-cooled data sheds pumping heat into the surrounding deserts make me wonder quite how green ebooks can be, but on the whole there must be fewer dead trees around.
Interesting point re the comparative green-ness of paper books and ebooks. Paper books use trees – but require trees to be planted to create more paper, and the carbon stored in paper tends to stay so captured (unless eventually burnt). Paper books do use more energy in their manufacture and distribution though.
What annoys me is that ebooks often cost more than the same title can be bought for on paper, on line, even after p&p costs. That makes no sense to me; the marginal cost of ‘manufacturing’ and distributing an ebook to a purchaser is negligable.
While not defending Amazon’s legal, but highly dubious, use of tax legislation, it is wrong to single out large American companies. Vodafone and many other British high street names routinely engage in complex schemes with no business purpose than to lower their effective rate of tax.
The book/ebook VAT “anomaly” is not unique. The VAT system is overly complex, illogical and full of anomalies. For example, a Gingerbread man solely with icing “eyes” attracts no VAT…a Gingerbread man with icing “eyes”, “buttons”, etc does attract VAT!
It would arguably be more logical to charge VAT on all items but at a substantially reduced rate. However, this is unlikely as at the end of the day VAT, as with any form of tax, is highly politicised as “Pastygate”!
It has been heartening to see many providers of personalised printed photobooks reduced their prices subsequent to a VAT tribunal decision that they were zero-rated.
A measure of how much people care regarding price changes (or lack thereof) will always be measured by companies in terms of sales. If a company didn’t lower it’s prices in line with any VAT change then I would buy them elsewhere.
That’s interesting. I didn’t know that personalised printed photobooks were now zero-rated. We must talk to Blurb again.
This wasn’t meant as a diatribe against US companies in particular, it’s just that they tend to make more visible targets. I agree with you about avoiding companies which don’t reduce prices when taxes are lowered — but please tell me where you buy your petrol.