End of the 99p download? VAT shake-up could actually make Apple downloads cheaper

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Reports that Apple download prices could shoot up because of a VAT shake-up are wide of the mark

Reports that a shake-up of the UK's VAT legislation will make downloads more expensive could be wide of the mark.

The changes, which were quietly introduced in last week's Budget - will see the Treasury block a VAT loophole that allowed companies to charge the tax based on where the download originated, sometimes in countries where VAT is significantly lower than the UK's rate of 20%.

Although some media outlets have claimed the changes could mean an end to 99p song downloads, the way the tax is charged could actually reduce the VAT rate for purchases made from certain companies, including Apple.

From 1 January 2015 these services will be taxed in the Member State in which the consumer is located

"As announced at Budget 2013, the government will legislate to change the rules for the taxation of intra-EU business to consumer supplies of telecommunications, broadcasting and e-services," the government said in its Budget document.

"From 1 January 2015 these services will be taxed in the Member State in which the consumer is located, ensuring these are taxed fairly and helping to protect revenue."

Far from raising prices, the new legislation could have the opposite effect on Apple's download prices, because its European operation is based in Ireland, where the VAT rate is 23%.

In its VAT Help pages, Apple highlights how it imposes taxes based on Ireland's rate.

"Why do I pay 23% VAT on Electronic Software Download orders and other products which are classified as services?" asks the company FAQ.

"The VAT rate for Apple customers who purchase Electronic Software Downloads or other Apple products which are classified as services under EU Vat law will be 23% Irish VAT. This is because the place of supply of these products under EU VAT law is Ireland as the country from where Apple Distribution International makes these supplies."

In all likelihood, such a small difference in VAT rates wouldn't be passed on to the consumer, with Apple simply keeping a greater share of the revenue.

"Often the prices are standardised across the region so the VAT is almost averaged out, but effectively the change could lead to price changes," said Alan Pearce, VAT partner at accountancy firm Blick Rothenberg. "You can only speculate on whether companies would absorb the costs or increase margins or change their prices given these changes."

Amazon increase?

The rate of VAT charged on Amazon downloads could increase, however, as it uses Luxembourg's rate. "Sales of digital products and services including Kindle content, Amazon Apps, Software & Digital Games (including prepaid gaming cards), MP3 downloads, Cloud Player, and Cloud Drive are shown inclusive of Luxembourg VAT rates of 15% (3% for e-books)," the company says in its guidance, adding that some countries already demand VAT based on where the consumer lives.

"For customers based in Iceland, Norway or Switzerland, Amazon will charge local VAT in line with local VAT legislation."

Amazon, Apple and the Treasury have so far failed to responded to requests for clarification on what the changes will mean for UK consumers.

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