UK government holds firm on e-book VAT

The UK government has reiterated its view that it cannot bring down value added tax on e-books despite moves by the French and Luxembourg governments to cut tax rates on digital books so they are charged at the same level as those imposed on print books.

Last week, Tom Blenkinsop, the Labour MP for Middlesbrough South and East Cleveland, asked the government if it would consider bringing down the VAT rate on electronic publishing, and this week followed up with a further question asking whether it would follow France in unilaterally bringing the rate down, even though current EU law forbids it.

But David Gauke, exchequer secretary and Tory MP for South West Hertfordshire, in a written response reiterated the government's position that such a move would be unlawful. He said: "Under EU law, VAT on electronic books must be charged at the standard rate. A reduced rate cannot be applied to digital or electronic supplies, or supplies of text via the internet, as they are classed as supplies of services rather than physical goods. There is therefore no scope in the principal VAT directive to apply a reduced rate on e-books."

France has also been followed by Luxembourg, which brings its VAT rate on e-books down to 3% from January 2012. The Luxembourg move in particular hands a huge advantage to the dominant e-bookseller Amazon, which supplies e-books to UK customers from the Grand Duchy.

Amanda Tickel, a partner of KPMG, professional services firm, told the FT this week that the Treasury should rethink its decision, adding that Luxembourg believed it had a technical basis for its rate reduction. She said: "This is a key development. If the UK doesn‚t follow suit, it risks missing out on a massive future revenue stream in digital."

The EU has already indicated its willingness to rethink how VAT is imposed on electronic services and has indicated that it wishes to treat similar goods and services to the same VAT rate. It will also change how VAT is applied to electronic services so that VAT will be applied at the rate of the country where the service is received, in this case the UK, rather than where it was drawn from - but not until 2015. The French government has told publishers that it will pay fines imposed by the EU as a result of its decision.

Separately France has increased its lower rate of VAT on books from 5.5% to 7%, though this has been delayed by three months to allow the French book trade to adjust. It will now come in on 1st April.