UK isolated on e-book VAT as Italy and Malta cut rates

The UK is looking increasingly isolated in charging 20% VAT on e-books after two more European countries lowered their rates to be in line with print books.

Italy has ruled that VAT on e-books will be cut from the standard 22% to 4% so it matches the rate imposed on printed books. Meanwhile, Malta has decided to cut its VAT on e-books from its standard 18% to 5%, also so it is in line with print. In both cases the changes come in on 1st January 2015.

Italy and Malta’s decision to break ranks and charge a lowered VAT rate on e-books follows that of  Luxembourg and France, which charge 3% and 5% respectively. Both those countries had been threatened with prosecution by the European Court of Justice (ECJ) for lowering their e-book VAT rates.

This week the French Publishers Association (Syndicat National de l’Edition, SNE) warned its members that France may raise VAT on e-books from 5.5% to the standard 20% during the first half of next year to avoid a fine of several million euros from the European Court of Justice, according to the trade publication Livres Hebdo. The judge in charge of the case is expected to hand down a ruling shortly, and would undoubtedly impose a fine for infringing community law.

From January e-booksellers will have to charge VAT at the rate set by the country where the buyer resides, rather than the rate where the servers are located. This has benefited companies such as Amazon, Apple and Nook for years, as they have been able to charge 3%, the Luxembourg rate for e-book published in the UK and sold to UK-based customers.

The new rule means that consumers could face rising e-book VAT charged from January, because the UK charged 20% VAT on e-books. This has been the source of some controversy as The Bookseller reported on in October, with many retailers calling on there to be an equal VAT rating on printed and e-books, as physical books attract a 0% VAT rate in the UK. There has also been wide-spread concern that smaller UK e-booksellers, publishers, and authors could face an administrative nightmare managing the different VAT rates across the EU.

The move means there will be intensification of pressure on the government, and more widely to end the anomaly where printed matter attracts a lower rate of VAT than digital books, which acts contrary to the EU's stated aim for ‘fiscal neutrality’ on similar goods and services. In September the ECJ ruled that countries may use different rates for the same goods delivered through different channels and it did not necessarily breach this ‘fiscal neutrality’ afterall.

Richard Asquith, vice president of Global Tax  at online accounting service Avalara, said: “Italy and Malta have broken ranks on e-books tax, after EU member states failed to gain consensus in October. Their move could put pressure on the UK Treasury to change its stance.”

He added: “We could see more countries follow suit from January in line with the new VAT rules on digital services that come into effect on the 1st.”

The UK government has previously made is clear that it has no intention to lower the rate on digital books. The UK enjoys a special exemption of zero rate on printed books, negotiated when it entered the Common Market, and there are fears that any harmonisation would result in physical books losing this zero rating.

In October, publishers and retailers told The Bookseller they will aim to prevent e-book prices from soaring when the VAT law on digital products is introduced on 1st January. At the time, a A HarperCollins spokesperson told The Bookseller the pricing issue was “complex”, and said “there is no one-size-fits-all solution, beyond the absolute assurance that we’re doing everything we can to minimise the impact on consumers while protecting our authors’ royalties.”