Britain to Close Loophole on Digital Downloads VAT
- Mar 24, 2014 | Gail Cole
Brits who download songs from American-owned Apple and Amazon could soon see a tax increase on those transactions. British Chancellor George Osborne intends to close the loophole that allows digital downloads to be taxed at a reduced rate, as foreign sales. Beginning January 1, 2015, Apple, Amazon and similar internet sellers will have to charge the United Kingdom’s 20% value added tax (VAT) rate to sales of digital downloads.
According to The Guardian, the announcement was made without fanfare. It read:
“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.”
Currently, both Amazon and Apple sell digital downloads through countries with much lower rates of VAT. Luxembourg, for example, has a VAT rate “as low as 3%.” Officials predict that once sales of digital downloads are taxed at Britain’s 20% VAT, an additional £300m could be raised for the Treasury.
Certainly the reduced VAT on digital downloads has had a noticeable impact on revenue. Research by Greenwich Consulting suggests that in 2012, the UK lost “more than €2bn (£1.6bn) a year in VAT on digital services.”
A question of fairness
It is also a question of fairness. Many British believe the existing laws give “online retailers an unfair price advantage over those who sell physical goods in the UK.” At the 2013 World Economic Forum, British Prime Minister David Cameron spoke of just that. Referring to Starbucks and other global companies that set up “ever more complex tax arrangements abroad to squeeze their tax bill right down,” he said the public has “had enough.”
This is similar to the argument made about online sellers by many Main Street businesses in the United States. The Marketplace Fairness Act of 2013, federal legislation that would allow states with simplified sales tax laws to impose a sales tax obligation on certain remote sellers, has been approved by the Senate but is still being discussed in the House. Main Street businesses believe this legislation is essential to their survival, as they have trouble competing with online retailers who can sell the same product without sales tax.
Early polls indicate a good deal of public support for Mr. Osborne’s budget. As the Economist notes, “The budget that truly moves the needle is rare.” But if Britons are still unhappy about the state of the economy, “increasingly, they think the right people are in charge.”