From today, VAT is not chargeable on ebooks and emagazines. What does this mean? Strap yourself in, this is a longish post.
HOW DID/DOES VAT AFFECT EBOOK PRICES?
For my overseas friends, VAT is our version of Sales Tax, and is (mostly) rated at 20% of the cost of the item being sold.
Historically, physical books and magazines have been zero rated for VAT. So, when a shop sells you a book for £12, the book costs £12 (with no VAT element). The store gets to keep the whole of that £12. Compare this to a hammer, for instance. If you buy a hammer for £12 from a retailer, you’re paying £10 for the hammer plus 20% (£2) in Value Added Tax. The store gets to keep £10 and passes £2 across to the government. The price of the hammer from your point of view is £12, though though the actual price is £10 + VAT. This is a somewhat simplified version of the VAT process, but it’s enough for this essay.
So, physical books (and magazines) are zero-rated for VAT, but ebooks and emagazines have always attracted VAT. This is because an ebook is , in essence, a simple piece of coding with the text of the book as it’s purchasable content, and has therefore been traditionally classed for VAT purposes as software. Software has VAT charged at the maximum rate (20% since 2011, 17.5% before that). So, an ebook that cost you £6 was actually £5+VAT.
WHAT HAS CHANGED?
From today (1st May, 2020) ebooks in the UK are no longer subject to VAT.
WHAT WILL THIS MEAN FOR THE PRICE OF EBOOKS?
There are 3 main scenarios, and I am going to use the following definitions: “Selling Price” will mean the price the publisher sells the ebook to the retailer.
“Purchase price” will mean the price the reader pays the retailer for the ebook – the actual £-value of the transaction.
For the sake of simplicity. I’m going to assume that the ebook is being sold to the reader at full price, with no retailer discount ro publisher promotion.
- Publishers may choose to keep their selling price the same, so that the £5+VAT ebook has a Purchase Price of £5, not £6. If they do this, the publisher gets the same as they always did, the author gets the same per-book royalty as they always did, the retailer gets the same profit margin they always did, but the reader pays £1 less and the government loses that £1 revenue.
- Publishers may choose to keep the purchase price the same, so that £5+VAT ebook becomes £6. If they do this, the reader pays the same price they always paid, but the publisher, retailer and author share the additional £1. Publishing is a low margin business, so keeping the purchase price the same helps publisher margins and also increases the author’s royalty and the store’s profit.
WHO SHOULD BENEFIT FROM THE REMOVAL OF VAT?
So, who should get the additional £1 that is no longer going to the government? The author? The publisher? The retailer? The reader?
Well, that depends on your point of view, and there’s absolutely no single answer that is correct.
We will find over the coming weeks and months that some publishers will pass the VAT saving across to the readers, and some won’t. Some readers will benefit from slightly lower prices, and some publishers and authors will benefit from slightly increased revenue. There are no losers here, except for the government coffers., but according to a recent report I read UK book sales in 2017 were a little over £3 billion. Ebooks account for approximately 20% of that, so ebook sales in 2017 were around £600million. VAT would account for around £100 million of that total, which sounds a lot, but is a drop in the ocean for UK expenditure.
So, whether you favour a price reduction for the reader, or more stability for the publisher along with higher royalties for the author, whichever scenario is chosen, someone wins and no-one loses.