Strong economic case for taking VAT off digital publications, report finds

A report conducted by consultancy Frontier Economics has found a "strong" economic case for taking VAT off digital publications in the UK, as permitted under newly agreed European Union rules.

The report, "Assessing the Case for Zero-Rating VAT on Digital Publications", was conducted independently but commissioned by the Publishers Association and the Professional Publishers Association. Its publication comes just a week ahead of the government's next Budget, scheduled for Monday 29th October.

Studying the market for books, journals and magazines, though not newspapers, Frontier Economics put the direct cost to the Exchequer of removing VAT from digital publications at £210m in 2019/20, rising to £250m in 2023/24. In itself that cost would be just 0.03% of total tax receipts in the 2019/20, or 0.14% of total VAT receipts, and compares favourably with the cost of other zero-rated good and services (such as prescription drugs or children's clothing), the consultancy found.

Moreover the expense would be offset by savings to the Exchequer of an estimated £50m-£55m per year from publicly funded institutions - such as libraries - buying VAT-free digital publications more cheaply. 

The report acknowledges that is hard to predict reliably the extent to which the removal of VAT would be passed through to consumers by the publishers, saying it is "market specific".But where that does happen, Frontier Economics notes that consumers may use the money they have saved from buying digital publications more cheaply to spend on other goods, boosting VAT receipts on those alternative purchases - again representing a reduction in cost from the £210m the Exchequer has lost out on. 

There would also be considerable other benefits from the move - again presuming that publishers reduce their prices once VAT is taken off books and journals. It would help expand the social and economic benefits of reading, especially among the "budget constrained", said the report - those on low incomes, public libraries, students and academic libraries. Estimates suggest low literacy rates in the UK cost the taxpayer £2.5bn every year and could cost £32bn in GDP growth by 2025, the report notes.

The reduction in VAT could also provide a stimulus to higher investment by publishers, both in skilled staff and to help them keep pace with innovative new online platforms. That could lead to an expansion in publishing, again putting more money back into the hands of the Exchequer through increased revenues from corporation tax, income tax and national insurance contributions. The books and journals publishing sector generates £3.2bn in gross value added directly and potentially up to £7.8bn for the wider UK economy, calculates Economic Frontiers.

Harmonising the tax on print and digital would also simplify the tax system, with savings to business and HMRC, the report said.

Commenting on the report, Stephen Lotinga, c.e.o. of the Publishers Association (pictured), said: “The government now has the power to axe the reading tax and with the Budget fast approaching, it’s time for the Chancellor to act.

“This new research shows the consumer and economic case for making this change is compelling and the government must act now to uphold the long-standing principle that taxation will not be a barrier to reading and learning.

“E-books and other digital formats are widely read by UK consumers, and vitally important for those with a disability or impairment. This deeply unfair and illogical tax makes no sense in the modern world. Readers should not be penalised for choosing to embrace digital.”

Currently printed books and journals are zero-rated for VAT in the UK, but digital publications are taxed at 20%. However earlier this month the EU's Economic and Financial Affairs Council (Ecofin) agreed on a proposal which allows all member states to give e-books and audiobooks the same VAT-free status as printed books, if they so choose.