Books, eBooks, and VAT

eBooks have been a hot topic all year. Prompted by my proud 10th follower on Twitter I thought I'd jot a short post to highlight where we are and what can happen next.

When EU and UK VAT legislation was drafted eBooks didn’t exist. Hence books have been defined in VAT law as being in physical form, and an eBook falls within the broad category of an "electronically supplied service". The result in the UK is books at 0% VAT and eBooks at 20%. Not very modern, or fair it may seem.

So why not change the law? Unfortunately it's not that simple. VAT is an EU harmonised tax, and when the UK joined the EU it agreed to follow the VAT Directive. Any "new" reduced rates in the UK must be EU wide and permitted by the Directive. Currently it is not permitted to apply a reduced rate to eBooks, a change would require 27 member state approval, and we all know this doesn’t happen quickly. More on this in a bit.

An added twist is that eBooks are currently subject to VAT where the supplier is established. This means that if you (a UK resident) buy an eBook from a UK based company you'll be charged 20% UK VAT, but if you buy one from a Luxembourg based company you'll be charged 3% VAT. Next time you buy an eBook have a look at the t'c and c's, you may be interested to see who it is you're actually buying your eBook from. The rules change in 2015 but for the moment there is a competitive advantage for eBook providers to be located outside the UK.

Why can Luxembourg charge a 3% rate and not the UK? On 1st January 2012 France introduced a 7% reduced rate for eBooks, and Luxembourg (possibly in response to this) a 3% rate. Whether France and Luxembourg are correctly able to do this within EU VAT law is a complex question. However, there is a technical difference between the two. Countries who had existing reduced rates of VAT for certain goods/ services were allowed to keep these when they joined the EU; Luxembourg’s 3% is a pre-EU rate (similar to the UK’s 0% rate), whereas France appears to be extending an EU wide reduced rate. So when it comes to extending our 0% VAT rate to eBooks the UK ought to be in a similar position to Luxembourg.

David Gauke that Treasury Minister has said that “There is therefore no scope in the principal VAT Directive to apply a reduced rate on e-books”. This is technically correct but doesn’t really answer the question as the UK 0% rate is permitted outside of the Directive. The real question is whether the UK can legally extend/ apply its 0% VAT rate to eBooks, and the technical article “How to Zero-Rate eBooks” suggests that it probably can: www.taxjournal.com/tj/issuearticles/909

Actually this would put the UK in a very strong position as it is one of only two EU countries able to apply 0% VAT to books. If this rate could be extended to cover eBooks, the UK could undercut both Luxembourg and France (and pretty much all the EU) as being the most preferable location for an eBook business. The reality is that that political pressure will probably mean that the EU VAT treatment of eBooks will eventually fall in line with physical books. This is not the easiest time to attract business to the UK, perhaps the government is missing a trick...