VAT on eBooks: What’s going on?

November 3, 2016
by John Websell

Avid readers will no doubt be aware that, for the moment at least, eBooks are charged the standard 20% rate of VAT in the UK, despite the fact printed literature is VAT free.

The result of this additional charge means that, although digital copies of books, magazines, and newspapers etc. are still cheaper than analogous physical copies, it’s still much more expensive for people to enjoy reading on an eReader in the UK, compared to their European counterparts. Furthermore, current legislation makes it more difficult for smaller publishers and novice authors to compete with the likes of Amazon, for reasons that will be discussed later in the article.

Fortunately, due to frequent complaints from a variety of people throughout the UK, we’re on the brink of seeing these nonsensical charges dropped. Nevertheless, today ABRS takes a look at the regulations as things stand, the impact they have on the publishing industry, and the nature of the planned changes.

Current regulations

As has already been stated, printed books, newspapers, and magazines are exempt from tax in the UK, unlike their online equivalents: but why? It seems counter intuitive that additional charges would be applied to digital copies of the written word, when they’re not subject to the same production and distribution costs as physical books. Fundamentally, this is due to the classification of eBooks as an ‘electronic service’, which, under current European Commission legislation, isn’t eligible for VAT reductions.

Thus consumers have to pay the 20% VAT rate, raising the costs of eBooks themselves; but there are other problems too. Different countries charge varying rates of VAT throughout Europe, in turn enabling companies like Amazon (among others) to register the companies in Luxembourg, so as to benefit from the nation’s 3% rate. Practically speaking, this loophole permitted Amazon to get the most profitable deals from publishers, and undercut UK retailers who had to pay Britain’s 20% VAT rate.

Obviously, this was a major problem for nations like Britain, as Amazon has a monopoly on the eBook market – it sells an estimated 90% of digital literature in the UK according to The Guardian. In response to this, the European Commission changed the regulations back in 2015, thereafter charging VAT based on the consumer’s location, rather than the businesses in an effort to level the playing field. Regrettably, this attempt to equalise the industry hasn’t really alleviated the problem at all.

It’s still extremely difficult for smaller publishers to compete in the eBook market, with Amazon retaining its monopoly on the industry despite the amendments. For example, a KPMG survey from 2015 found that 75% s of the 156 businesses polled were contemplating raising the prices of their products this year to cover the VAT charges, whilst 3 in 10 admitted they may withdraw services from specific states altogether. What’s more, it’s not just smaller businesses that are considering price rises; Amazon has also suggested it will follow suit. This is particularly awkward given the organisations domination, which has actually increased since the 2015 rule modification.

Indeed, prior to 2015, smaller publishers and self-published authors had a number of options open to them when it came to selling their books digitally. Nook, Kobo, Kindle and the like were the most common platforms of course – even though they took generous slices of sales revenue – but there were alternatives. For instance, authors who had the requisite knowledge to design their own website, format eBook files correctly, and set up a PayPal plug-in, were able to distribute the books themselves rather than relying on a third party, allowing them to keep all the profits.

After the changes however, these authors and publishers had to undertake the laborious task of calculating VAT themselves, charging different rates depending on the consumer’s geographical location, as we’ve seen. Additionally, the new rules are such that the sale of a single eBook to anyone outside, requires VAT to be applied to all UK sales too; whereas in the past, this was only applicable to those with an annual turnover greater than £81,000. Inevitably therefore, more people than ever were drawn to Amazon during the period.

Forthcoming changes

Earlier this year, the European Commission first revealed its plans to review and revise the current rules applying to VAT on digital publications and eBooks, in response to the continued dissatisfaction of consumers, authors, and publishers alike.

Specifically, the discussion has revolved around whether or not to give member states of the EU the freedom to apply lower VAT rates, perhaps even giving them the option of applying a zero rate on such electronic services eventually, if it becomes clear during discussions that affected nations would prefer this approach.

Aside from lowering costs – not to mention providing authors and publisher’s greater opportunities to flourish – arguably the most significant result of the proposed amendments, is that books will be open to a wider number of individuals; young people especially are far more likely to read books on electronic devices, rather than traditional paperbacks or hardbacks. Moreover, lower prices will reduce the costs facing students at college and university – who are already beleaguered by extortionate tuition fees – whilst older generations may look more favourably on eReaders in future, if they are markedly cheaper.

The commission’s final decision on the subject may be relatively soon in coming, if they stick to the end of year deadline proffered when discussions first began. Consequently, we may not have long to wait before we’re able to download books to our hearts content, secure in the knowledge that we’re not paying over the odds for the privilege.

Death of the paperback?

No one will argue that the VAT charges on eBooks have been a nuisance for the majority of people in the publishing industry for far too long, and that the forthcoming changes are welcome. However, that being said, putting electronic publications on the same footing as their digital counterparts will almost certainly precipitate the decline of the paperback and traditional libraries.

Before bemoaning the advances of technology, in reality, this is probably a good thing. After all, eBooks are far less demanding on the world’s forests and much more practical for bookworms who want to take a book with them on their holidays.

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