No More £0.99: Tax Loophole Closure in U.K. Could Up the Cost of Digital Goods

The price of music downloads in the United Kingdom could be set to increase following new tax laws that threaten to end the standard price of £0.99 ($1.63) for song downloads.
 
The tax changes were outlined in Chancellor George Osborne’s annual tax budget and come into force January 1, 2015, when download stores such as Apple’s iTunes and Amazon will be forced to charge VAT (sales tax) on all music, book and app purchases at the higher 20% rate.

At present, download stores such as iTunes and Amazon are able to charge U.K. consumers a reduced rate of sales tax for music downloads, online apps and e-books by basing operations in European countries such as Luxembourg, where VAT rates are among the lowest in the European Union. Both Amazon’s European headquarters and iTunes S.a.r.l, the Apple subsidiary which runs European iTunes online services, are based in Luxembourg, where the rate of VAT is 15% on music downloads and as low as 3% on e-books.
 
However, that tax loophole will be closed on January 1, 2015, with download services thereafter required to charge sales tax based on the country where the consumer resides rather than where the seller is based. According to the U.K. Office for Budget Responsibility (OBR) the change will generate an additional £300 million ($495 million) in VAT revenues for the British Treasury in its first year. Neither Apple or Amazon is currently registered for VAT in the United Kingdom, with George Osborne's budget measures arriving as part of a Europe-wide set of VAT reforms designed to address taxation of broadcasting, telecommunications and e-services.    
 
It is not yet known what impact the tax hike will have on consumers. One possibility is that labels, publishers, app developers and download platforms will absorb the extra costs to ensure that price levels remain roughly the same. The other alternative is that download prices will incrementally rise in line with the tax increase.