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VAT rule overhaul could result in 16p increase in MP3 unit pricing
By Chris Cooke | Published on Monday 24 March 2014
The cost of MP3 downloads could rise by 16p next January following a dull looking but actually quite important statement published alongside George Osborne’s budget speech last week regarding the way VAT is applied to online purchases.
Before the rise of online shopping, the rules governing sales taxes like VAT assumed that in the vast majority of cases the seller and customer in any one transaction would be based in the same tax jurisdiction, which sometimes left loopholes when that wasn’t the case. As much previously reported, much attention initially fell on the fact that mail-order operations based on the Channel Islands could sell low-price products like CDs into the UK without charging any VAT at all, giving those operators a 20% advantage over mainland retailers.
Since Osborne closed that loophole, attention has shifted to the VAT arrangements of digital stores like iTunes and Amazon MP3. At the moment the default rule in Europe is that sales tax is applied in the country where the business is based, rather than where the customer lives. This means that digital content sellers can base themselves in countries with more favourable sales tax rates, which in the European Union often means Luxembourg.
Which again resulting in these big online operators having an unfair advantage over high street and small-scale retailers who are based within the UK and have to charge the higher British sales tax rates. It’s also creates complications for British app-makers selling via the Apple store, and for business customers of iTunes seeking to claim the VAT back. And, of course, it means that the Luxembourg taxman gets all the sales tax generated by British download sales.
Work to close this particular sales tax loophole has been underway for a while now, but last week Osborne confirmed that his upcoming finance bill will seek to have the rules changed so that VAT is charged in the country where the customer rather than the seller is based. Which means more VAT income for the UK government, but also that the tax rates for services currently applying sales tax in Luxembourg will shoot up from the current 3% to 20%. Adding 16p per 99p download.
Osborne’s budget document confirmed last week: “As announced at budget 2013, the government will legislate to change the rules for the taxation of intra-EU business to consumer supplies of telecommunications, broadcasting and e-services. From 1 January 2015 these services will be taxed in the member state in which the consumer is located, ensuring these are taxed fairly and helping to protect revenue”.
Assuming neither content owner nor download platform will especially want to absorb the tax increase, it seems inevitable that download prices in Europe will rise in early 2015, so that the average price of 99p will become £1.15.
Of course download stores these days – unlike with the original iTunes set-up – offer content owners variable pricing, so that some tracks go for less than the 99p average and others are priced higher, which possibly means subtle price increases across the board won’t be so noticeable. Indeed, since iTunes enabled variable pricing, the labels have quietly increased the average single track download price from 79p to 99p.
Though at a time when download stores are facing new competition from ad-funded and subscription-based streaming services, and with speculation that the European download market might follow its US counterpart and peak in the near future, a sudden price increase might not be ideal. Though whether that will mean the labels – or even Apple, which does seem to be worrying about the iTunes Store losing its hold over the digital content market – are willing to absorb some of the tax increase remains to be seen.
