UK missing out on £1.6bn of VAT on digital services sales

About to head onto Amazon and download Nigel Slater’s Kitchen Diaries II for the tastiest tips on what to cook up for Christmas? Think again. The UK has lost out on literally billion of pounds on the sale of digital media from overseas companies, a report has found.

Leading telecoms and digital consultancy Greenwich Consulting, who produced the report, suggests the UK is losing over €2bn (£1.6bn) a year in VAT on digital services bought from overseas-based suppliers such as Amazon. If the situation continues, it is thought the UK will lose £10bn between 2008 and 2014. According to ministers, the London Games cost taxpayers £9bn.

Under the EU’s VAT rules, apps, ebooks and music downloads are considered ‘services’ rather than products. When British consumers buy these ‘services’ from companies based outside the EU, VAT is imposed at the rate that applies in the country where the supplier has its headquarters, not where the ‘service’ is sold. Amazon, for example, is based in Luxembourg and therefore charges its customers three per cent VAT for ebooks, compared with the 20 per cent levied in the UK.

Boycott

Margaret Hodge, chairman of the Public Accounts Committee, has boycotted Amazon and Starbucks – another multinational which is enjoying the tax loophole. David Cameron’s official spokesperson has however said that it’s up to individuals whether they choose not to buy products from a particular company, but that the government is committed to tackling aggressive tax avoidance.

The EU plans to change the way VAT is charged on digital services between 2015 and 2019. The report commissioner, Philip Marini, chairman of the French senate’s finance committee, supports an earlier date for a change of VAT rules.

“At the European level we need to renegotiate the schedule for implementing the VAT directive on electronic services in order to bring its application deadline nearer than 2015 or 2019, the term of the transition phase,” Marini said.

An HMRC spokesman said: “It is a natural consequence of the VAT rules rather than any lack of compliance that a business in say, Germany, supplying such services to UK customers will account for VAT in Germany and not in the UK.

“Businesses have the freedom to establish themselves in whichever member state they wish. However, some UK businesses claimed to have moved their operations to other member states in order to benefit from lower VAT rates where in reality the supplies were still made from the UK. HMRC has successfully challenged such arrangements.”

UK a huge market

According to Greenwich, The UK was by far the biggest market in Europe for business to consumer (B2C) digital services. Worth €124bn overall in 2009, the UK accounted for over one third of total sales.

But the UK was the least able to convert B2C sales into revenue – generating only an estimated 15 per cent. France and Germany achieved conversion rates of 19 per cent and 21 per cent each, while Benelux countries converted 50 per cent of their €3bn B2C trade into tax revenue.

Another report published earlier in the year found that the UK’s internet economy is growing at rate of 10.9 per cent. It is expected to contribute £225bn to the overall economy by 2016.