Amazon's VAT windfall

From 1st May, bringing forward a plan originally scheduled for the end of the year, the government has removed VAT from e-books. It was a change lobbied for by many writers, as well as the big publishers. They rallied under the stirring slogan "No Tax on Learning".

This is a good thing, surely, for authors and readers, making our books more affordable in these troubled times? A 99p e-book should go down to 83p. A £4.99 book will be £4.16. The reader benefits, the author benefits, the publishers benefit. Cool, eh?

No, not cool.

This is simply going to be a massive financial gift to Amazon, a company that has a near monopoly on the e-book market. Amazon have said that they’ll reduce the price of some ‘non-discounted’ e-books. It’s entirely up to them how they define "non-discounted". Are all the 99p e-books "discounted"? Most of them seem to be – so they won’t come down in price.

But my guess is that initially Amazon will reduce some e-book prices. What they won’t do is reduce them by the full 20% — there’ll be a few pence off here, a few off there. So there’ll be an instant financial bonus to Amazon.

And checking today, the prices don’t seem to have come down at all.  So already Amazon are cashing in. But it will get much better for them. The evidence from other areas in which VAT was cut is that market forces will slowly nudge the prices back up again. Do we really think that you’d be prepared to pay 83p for an e-book, but not 99p? Of course you will, so the price will inevitably go back up to 99p, in a few months. And that’s a beautiful windfall for Amazon. It means tens, hundreds of millions, to them.

If there were a genuine free market in e-books, then commercial pressures might exert a downward force, but those pressures simply don’t exist. When did you last see anyone with an e-reader that wasn’t a Kindle? Even on phones and tablets, the Kindle app rules. The whole Amazon buying process is smooth and efficient, and it requires a huge act of will to wrench yourself away from their ecosystem.

So who pays for this windfall? The government will have to either put up taxes elsewhere to cover the lost revenue, or cut spending. Those of you who think it’s a good idea, where would you make the cuts? Which taxes would you raise?

And of course bookshops will take a hit if the cut means that more e-books are bought at the expense of "real" books. So, we’ve taken some cash from hard-hit local bookshops, which pay their taxes, and given it to the monstrous tax-avoiding Amazon. Great move.

The only clear argument I’ve heard in favour of the cut is that it will help those few authors who sell their e-books direct to the public. But as Amazon alone has more than 95% of the market, that’s a very small benefit to a very few people, compared to the insane gift to the world’s richest man. It’s also been claimed that in some vague way the fact that there’s more money floating around that would otherwise have gone to the government, will mean that some of it drifts in the direction of authors and publishers. But again this assumes that 1. Amazon doesn’t just pocket it all; and 2. That e-book sales are given a boost; which means that 3. (as above) bookshops take yet another kick in the guts.

However I look at it, I can’t avoid the conclusion that this apparently benign gesture is a simply stupid way of pouring more money into the ravening maw of Amazon.

Just a brief note about myself. I worked on VAT policy at HM Customs & Excise (as was) for most of the 1990s. I left in 1999, and have scratched a living as a writer ever since. I certainly wouldn’t describe myself any longer as a VAT expert, but I have a little grounding, at least, in the area.

My one proviso is that I can’t claim to know anything about the details of the arrangements between publishers and Amazon, when it comes to e-books. I’ve assumed that it’s a "normal" VAT transaction. Before the cut, a publisher would supply the e-book to Amazon, for a cost X, plus 20% VAT on that supply (and being able to reclaim any VAT they incur as a business). Amazon then make their mark-up, adding VAT, which finally "sticks" with the final consumer. In the new regime, the publisher zero rates the supply to Amazon. It’s then entirely up to Amazon what they charge. They can pass on the reduced cost, or keep it. There is no legal mechanism for forcing them to pass it on, only market forces which don’t apply to a monopoly.

But I don’t know — perhaps there is some mechanism that would force Amazon to pass on the saving (though I don’t quite see how), but then that just takes us back to Amazon stomping on the other booksellers.

Why has this happened? Because VAT is boring and complicated and nobody wants to think about it too much. Which is why authors got on board with the "tax on learning" slogan. And the big publishers? They, obviously, have the legal brains to understand this, and I can only speculate about their agendum. It may be that they are keen, long term, on the savings possible with e-books. Or maybe they’ve been bullied by Amazon.