VAT on e-books

Tom Harris Excerpts

Wednesday 2nd July 2014 Westminster Hall

[Mr Tom Harris (Glasgow South) (Lab)]

Through you, Mr Hood, I thank Mr Speaker for giving me the opportunity to raise this matter. I raised the subject under a Labour Government in the last Parliament, before the 2010 election. Sadly, many of my concerns have not receded. I welcome the Minister to her place.

It is not necessary to go into a long exposition about the importance of books or reading. We can take for granted the Minister’s agreement that encouragement to read books is a good thing, and that any Government, whatever their political colour, want to promote the reading and enjoyment of books.

I declare an interest at the outset in that I am an avid reader and, in the past four years, have become an avid reader of e-books downloaded to my Kindle or my iPad—my personal iPad mini, which I bought myself, not my publicly-funded iPad. I say that for the record lest the tiresome usual suspects see an opportunity to berate me for misuse of public funds.

My experience seems to be fairly familiar to other e-book readers. Purchasing an e-reader prompts the reader to buy more books than he or she did before. An additional benefit of e-readers is that I can now purchase books and store them unread on my Kindle instead of buying physical books and leaving them unread and gathering dust on my shelf.

Amazon states that UK users of the Kindle buy up to four times as many books as they did before they bought their Kindle. For those of us feeling the dreadful physical onslaught of the years, e-readers make print more accessible with adjustable font size and colour, and so encourage reading.

E-books offer greater consumer choice. I was delighted to discover that books by my favourite science fiction writer—the late, great Bob Shaw—which were out of print, are available again online to download. The renewed availability of previously out-of-print books from a huge range of authors has provided a much-needed revenue stream for publishers and authors, as well as offering readers greater choice.

E-books are a British success story and have helped to drive the recovery of the UK publishing industry since the financial crisis of 2008. Consumers in the UK are already the biggest e-commerce spenders in the world, and have been fastest in the EU to embrace e-books, partly because of the huge choice of English language books, partly because of competition and choice in e-book readers, and in large part because of the price competitiveness of e-books. That has brought big new opportunities to readers, writers and publishers.

Rapid year-on-year growth saw e-book sales in 2013 account for 21% of the value of the UK’s total book market, up from 8% in 2011. The Publishers Association reported that 29%, or about £1.5 billion, of UK publishing revenues in 2013 was derived from digital products. Amazon.co.uk’s Kindle e-books already outsell print books.

That is all good news, but the Minister will be aware that a change is coming that will have damaging consequences for all concerned, except the Treasury. For everyone else—authors, readers, publishers and online retailers—the consequences of the changes to be introduced in January, just six months from now, will reverse much of the good that the introduction of e-books has achieved in recent years.

Unlike printed books, which rightly attract a zero rate of VAT, e-books have the full rate of VAT added to their price. That is simply wrong, and I have thought so for several years. It is clearly unfair to recategorise a book as an electronic service, which is the justification for adding VAT, simply because it is downloaded rather than picked off a shelf. A book is a book is a book. The full UK rate of VAT is charged on any e-book sold in the UK, but that does not affect readers who buy a book from the Kindle store, because the VAT rate is that applying in Luxembourg, where Amazon is based.

From 1 January 2015, however, VAT will apply wherever the purchaser lives. For example, Donna Tartt’s “The Goldfinch”—which I would highly recommend to the Minister, although a drawback of e-books is that it is much harder for people to lend others their copy—which I purchased from Amazon a couple of weeks ago for £3.49, included a nominal VAT rate of about 3%. If we add an additional 20% to that cost, which is what I would have had to pay had I waited until next year to buy it, that will undoubtedly have the effect of discouraging many readers—not all, but many—from buying it.

The decision to buy a book is price-sensitive. Ofcom research shows that the willingness to pay for a single book download declines steadily as the proposed price of a book download increases. The average price that respondents were willing to pay was £3.74. About 42% of people were willing to buy an e-book at £5. Once VAT at 20% was added, bringing the cost up to £6, the proportion of consumers willing to buy it fell dramatically to 28%.

According to the Publishers Association, digital sales across all publishing increased in 2013 by 305% and digital revenues are now £509 million—or 15%—out of an overall book market of £3.4 billion. In fiction, e-books account for a third of all sales—that is £200 million —and for 7% of non-fiction sales.

But the association adds:

“These figures are likely to continue to increase, but at a slower rate of growth than in the earlier years of e-reading take-up, as the market matures... A further check on the growth of ebooks will come from the fact that they currently attract VAT (in the UK at the full rate of 20%). This is compared with the application of the zero rate of VAT on physical books—a long-standing feature of the UK’s tax regime—and is a reflection of the belief that the tax should not act as a disincentive to reading and learning. However, this important feature of the fiscal regime is absent for digital publications on which the full rate of VAT of 20% is applied. Research suggests that consumers are discouraged from buying ebooks by the VAT rate.”

The association continues:

“The European Commission Directorate-General for Taxation is conducting a full study of the whole of the VAT regime, and has identified ebooks as a particular focus of attention.

“We currently await a Communication from the Commission outlining its findings and recommendations—however, publication of this seems to be suffering from repeated delays. We believe that the UK Government should urge the European Commission to publish its findings following its study; and that the Commission should resolve to allow Member States to investigate applying lower rates of VAT on e-publications (books and academic journals). The UK should itself then undertake a similarly detailed study to analyse the impact of reducing the VAT rate on e-publications, with a view to reducing to the zero rate.”

E-books are a hugely important part of the UK publishing industry, which is itself a hugely important part of our creative industries, and in a week when the Government are pledging to help and support our creative industries, this debate has come at an appropriate time.

The UK is the largest e-book market in Europe, but the Society of Authors is concerned that publishers’ practices and the Government’s policies are creating barriers to growth and hindering development of the publishing industry. It told me this week:

“The largest barrier to growth for most authors is the difficulty of obtaining a proper return for their professional work. Authors’ incomes continue to be squeezed: fewer books are published and sold; advances and royalties have fallen while more unpaid work is expected of authors in marketing and publicising their work, including appearances and use of social media.

“Print books attract a zero rate of VAT, but their electronic equivalents attract a rate of 20 per cent in the UK. Other EU countries, such as France and Luxembourg, have unilaterally reduced the rate of VAT on ebooks. This means the UK will now be at a competitive disadvantage, as ebooks sold in the UK will be more expensive than those sold elsewhere. The result is often to drive down prices leading to a smaller net sum going to authors. Most of the major players in the ebook market are based abroad.

“Given the rapid pace of development in the ebook market, there is an urgent need for removing VAT on ebooks to avoid the UK slipping behind European competitors.”

There are those in the industry who welcome the change from charging VAT in the country where the e-book is sold to charging the consumer where he lives. As someone who has spoken in the Commons against Amazon and others for not living up to their moral obligations to pay tax, it is a change that I understand. However, this is not about Amazon or Kobo or any of the other e-book sellers avoiding tax. VAT on e-books is not paid by the seller; it is paid by us, the consumers. If the change goes ahead in January, while the Treasury sticks to its position of insisting that an e-book is not a book at all but the equivalent of a video game and is therefore subject to 20% VAT, the industry—the whole industry, not just those specifically involved in producing and selling e-books—will suffer, and suffer significantly.

The Government argues that their legal advice

“indicates there is no scope to change the VAT treatment of the sale of digital book… products under EU law.”—[Official Report, 14 May 2014; Vol. 580, c. 682W.]

I simply cannot accept that, because Luxembourg and France have already challenged it. They cut their rates for e-books to 3% and 5.5% respectively in 2012. There is no reason why the UK cannot follow suit. I certainly do not believe that Ministers in this Government, of all Governments, are reluctant to pick a fight with the European Commission.

Other European Governments have taken on the EU on this issue. Germany, Poland and Italy are all calling for reductions in the rate of VAT on e-books. Will the UK add its voice to that call? Even assuming that the Government stand by their legal advice, which has been published and publicised, will they add at least their voice to the calls on the European Commission for change?

Incidentally, the German coalition Government’s executive board decided in April to cut VAT on audio books to 7% from 19%. The German Ministry of Culture is also pushing at the EU level for the same 7% VAT rate to apply to e-books, in line with the rate for print books in Germany, so the decision, if made, would make e-books and print books equal as far as VAT is concerned.

A German Government spokesman said:

“Due to rapidly advancing digitisation”—

I do not know what the German for “digitisation” is, by the way, but I would be quite interested to find out—

“we insist on a rapid implementation of the agreed points. We want to make sure that print and electronic media and audio media are treated equally for tax.”

Well, hooray for the Germans.

In the House, we are only too aware of the need to nurture the next generation. As parents, we understand the importance of encouraging our children to read. My own children often borrow my Kindle to take to bed, although they have not yet mastered the art of charging the damn thing after they have used it—that may be further down the line. So, for a new generation who view CDs as a quaint old-fashioned way to buy music; who watch TV shows when it suits them, not when it suits the broadcasters; who download their video games, rather than queuing outside the shop; and who have a far greater number of distractions than any previous generation to prevent them from sitting down with a book, but who will, when choosing to read a book anyway, be more likely to buy it electronically, are we really saying that increasing the cost of that product by up to 20% can really be reconciled with an ambition to encourage the young to read literature?

Do the Government still accept that we should promote reading and literacy and do all in our power to widen reading and literacy? I know, of course, that the genuine answer from the Minister will be yes, but should we not therefore widen our support for print books to their digital equivalent? Are the Government willing to engage with the European Commission to hasten the completion of its impact study assessment of options to reform EU VAT rules, including those affecting VAT on e-books? Should the Government not be standing up to Europe and following the examples of France, Germany and Luxembourg by insisting on a substantially lower rate of VAT on e-books? This is one area where I would like to see a race to the bottom. I want the Government parties and my own party competing in the next few months leading up to the general election to see who can offer the lowest rate of VAT on e-books, because consumers, readers and authors, not politicians, would emerge the winners.

Lastly, and importantly, one activity I use my taxpayer-funded iPad for is reading newspapers, and I am a subscriber to the digital edition of The Times. I am delighted that, as revenue from journalism is increasingly scarce, newspapers have found a route to survive in the 21st century through digital subscriptions, but their route to survival is similarly under threat. This country removed taxation from newsprint more than 300 years ago—removing what was seen, rightly, as a tax on free speech. Now, however, the Treasury is stealthily reimposing it by requiring the 20% VAT levy for the proportion of every newspaper subscription that is digital. It was not this Government who introduced that, but the previous Government. This Government have merely continued it, and it is wrong.

As a former local newspaper journalist, I want a successful future for our local, as well as our national, press. When quality journalism by properly trained and professional staff is competing with numerous free sources, as well as so-called citizen journalists—well meaning amateurs with dubious qualification to write about their chosen field of interest—imposing an unnecessary 20% charge on newspapers is a serious blow to freedom of expression. That argument was first deployed, successfully, 300 years ago. It is no less relevant today. The Minister and her colleagues have an opportunity to be on the side of fairness, literacy, opportunity and culture. The question is whether her Treasury colleagues will allow her to grasp that opportunity.

[The Economic Secretary to the Treasury (Andrea Leadsom)]

It is a pleasure to speak under your chairmanship, Mr Hood. I congratulate the hon. Member for Glasgow South (Mr Harris) on securing a debate on this very important subject. I am aware that he has asked a number of questions on the issue recently. As he will be aware from the answers that he has received, I am filling in for my hon. Friend the Exchequer Secretary to the Treasury in Westminster Hall, as he is in the main Chamber leading on the Finance Bill. In his absence, I will do my best to answer some of the hon. Gentleman’s questions.

Of course, no one needs to be an expert on tax to recognise the importance of books. The hon. Gentleman is absolutely right—publishing is an industry in which the United Kingdom can boast to have always been, and to remain, one of the world’s leaders, be it because of Charles Dickens, Jane Austen or Agatha Christie. I understand that Barbara Cartland is one of our most lucrative book exports, but I am not personally so familiar with her novels.

[Mr Harris]

I suppose that at this point we should acknowledge that one of the Minister’s colleagues, the hon. Member for Mid Bedfordshire (Nadine Dorries), is consistently in the top six on the Amazon bestsellers list for e-books.

[Andrea Leadsom]

I am sure that my hon. Friend will be delighted to have been name-checked. Her sales will no doubt rise dramatically as a result of that helpful intervention.

The Government also recognise the crucial role that reading can play in increasing literacy among our younger generations, which is important to their future success. I remember that my two sons were five and three when the first Harry Potter books by J. K. Rowling came out. We used to snuggle up together, and none of us wanted them to go to bed, because we just wanted to get on to the next bit. There is no doubt about the contribution of some of the great British children’s and adults’ literature. I include C. S. Lewis and some of the other great children’s authors among those who have helped to support and sustain literature and pleasure in reading among young people and adults. Our new national curriculum, which comes into force this September, is clear that all pupils must be encouraged to read widely, both for pleasure and for information. We absolutely recognise the important role that books have always played in this country and will continue to play.

On the issue of tax, I begin by reassuring the hon. Gentleman that the Government recognise the importance of the e-services market in the UK and that Ministers are taking a number of actions to support the digital economy. E-services are a growing part of our economy, and we expect them to generate significant tax revenues going forward.

On the specific issue of VAT, I should briefly explain that, as the hon. Gentleman pointed out himself, it is governed by EU law, and that reliefs from VAT are strictly limited under EU law. As hon. Members may know, when the UK joined the European Community in 1973, we successfully negotiated to keep our existing zero rate on items such as children’s clothing, most foods and physical books, newspapers and journals. Most other member states do not benefit from that derogation.

[Mr Harris]

I apologise for interrupting, but when the derogation was granted on our accession to the EU in 1973, there was no reference to physical books, because e-books did not exist at the time. There was a concession on books, and as that derogation stands, it could be extended to e-books, as e-books come under the definition of being a book.

[Andrea Leadsom]

Yes, I accept the hon. Gentleman’s point, and I will come on to it if he will bear with me.

EU VAT law allows member states to implement reduced rates of VAT of no less than 5% for certain goods and services, listed in annexe III of the VAT directive, at the discretion of member states. One of those reliefs relates to the supply of books on all physical means of support, newspapers and periodicals, other than material wholly or predominantly devoted to advertising. Although that may sound like it includes e-books, article 98(2) of the VAT directive specifically excludes electronically supplied services from the reduced rates in annexe III. That means that the UK charges the standard rate of VAT, 20%, on e-books and the zero rate of VAT on physical books.

As hon. Members will be aware, the UK’s e-books market is a growing one. Therefore, it is not clear that it is in need of a stimulus in the form of a reduced VAT rate. Between 2011 and 2012, e-book sales in the UK increased from £138 million to £261 million, so at a time when the Government are working to tackle the economy’s problems head-on and deliver a recovery that works for all, it is not clear that we should offer fiscal support for such a rapidly expanding industry.

[Andrea Leadsom]

The hon. Lady will forgive me—I do not have those specific breakdowns to hand, but I will happily write to her on that point. I apologise for that.

[Mr Harris]

I am grateful to the Minister for giving way again. She has shown great patience, and I appreciate it. What she has just said, though, rather misses the point of my debate. No one is asking the Government to offer subsidies or favours to the e-book industry. What I am asking is that an impending charge that consumers in this country are not currently paying not be levied. She is right to say that the industry is doing well and growing. The problem is that people who buy books currently and pay 3% or 5% VAT will from 1 January pay 20%. We are not asking for any kind of subsidy from the Government; we are asking for the current situation to continue.

[Andrea Leadsom]

Again, I understand entirely the point of the hon. Gentleman’s debate. The issue is specifically that e-books are not counted as zero-rateable books from the point of view of the EU directive, so this is not an optional VAT charge. The EU directive requires us to treat e-books in that way, because they are treated as an electronic service. As the hon. Gentleman said at the start of his remarks, people can change the font; they can download e-books; they can switch from page to page without having to move pieces of paper, and so on. Therefore, they are deemed to be an electronic service and not the same as a physical book. The point that I am making is that our charging VAT on them is not optional.

Let me come on to the case of France and Luxembourg, about which the hon. Gentleman spoke, and in particular the difficult issue of books on Amazon. I am sure that, although he would support not paying VAT on e-books, he recognises that there has been an issue with big companies locating themselves in other places to take advantage of beneficial tax regimes that no doubt help their sales. As he pointed out, since 2011, France and Luxembourg have levied reduced rates of VAT—7% and 3% respectively—to bring them in line with their VAT rates on physical books. That is creating competitive distortions in relation to economic operators in other member states, and there has been pressure from the industry for the UK to reduce its VAT rate on e-books. The European Commission has begun European Court of Justice infraction proceedings against France and Luxembourg, and it has formally instructed them to apply their standard VAT rates to supplies of e-books. If the UK were to reduce the rate of VAT on e-books, it is extremely likely that we, too, would be infracted. I would be interested to know whether the hon. Gentleman thinks that we should seek to avoid infraction proceedings from the European Court of Justice or embrace them. We could be, unusually, on opposite sides of the argument on that point.

[Mr Harris]

I seem to remember being complimentary to the Minister when she spoke powerfully in favour of votes for prisoners in a debate on which we took the opposite points of view, and I believe that we are going to do the same again. I am more than relaxed about the UK being the target of court action by whichever European institution is relevant. I was relaxed about the idea when it came to votes for prisoners—we have to keep our position on that—and I see no difference, frankly, in this case. If the move would be good for the UK industry, we should stand up for that industry against interference by the EU.

[Andrea Leadsom]

I absolutely respect the hon. Gentleman’s position. Were we unilaterally to decide to change the VAT rate, we would, no doubt, be subject to ECJ infraction proceedings.

The other real issue is that a reduction in the rate of VAT on e-books would be likely to create border-line issues in the wider electronic services market, because problems of definition could lead to a widening of the relief through legal challenge and industry changes. That would put at risk serious amounts of revenue in the UK market, which is worth more than £2.5 billion.

I turn to the VAT changes that will be introduced in 2015. Currently, supplies of services, including electronically delivered services such as e-books, are taxed in the member states where the supplier is based at the VAT rate of that member state. Member states with lower VAT rates therefore have a competitive advantage, which encourages suppliers to locate there and sell to EU consumers, including the UK, at lower VAT rates. From 1 January, therefore, there will be a place of supply change, which will mean that e-books and other e-services will be taxed in the member state where the customer belongs at the VAT rate of that member state. That is designed to make competition fairer and to remove distortions.

Legal advice obtained by the Government indicates that there is no scope to change the VAT treatment of the sale of digital books and similar products under EU law. The Commission’s position is clear on the VAT rate of e-books: e-services attract a standard rate of VAT, because they are electronically supplied services. The UK’s rate is in line with EU law, and there is currently no intention to reduce the rate of VAT for e-books.

I am sorry to disappoint the hon. Gentleman by my reply, but I hope that he will be pleased to know that Ministers are focused on actions outside the VAT system to support the digital economy. In that area, we are making great efforts to encourage the digital economy. For example, in June 2013 the Government launched an information economy strategy, which includes positioning the UK strongly in the field of e-commerce by, among other things, improving digital skills across the population and creating the infrastructure to support innovation and growth.

Although I am sure that the hon. Gentleman is disappointed by my answer on VAT and e-books, I hope that he and other hon. Members are reassured that the Government support the sector and will continue to do so and that we are confident that the electronic services market will continue to grow and generate significant tax revenues.

[Mr Harris]

As there are a couple of minutes left, I wonder whether I could be cheeky and get in with another couple of points.

[Mr Jim Hood (in the Chair)]

Order. The hon. Gentleman was able to intervene, but the Minister has sat down and the hon. Gentleman cannot make another speech.

Question put and agreed to.