Chancellor Osborne and the exaggerated death of the 99p download

Tuesday March 25, 2014

The Treasury spin machine traditionally works at full tilt at Budget time and this year was no different, but this week's breathless reports about the death of the 99p download took the biscuit.

In a range of media from The Guardian to Wired to Forbes came the news that "in a little noticed announcement" in the Budget Chancellor Osborne planned to "clamp down" on a "tax loophole" affecting music downloads, apps and ebooks.

As a result, the days of the 99p download were numbered, the price of a single MP3 could go up to as much as £1.19 and the prudent Chancellor was set to net a huge windfall.

Unfortunately for the Chancellor, but fortunately for the rest of us, the stories bear little resemblance to reality.

First, the new measure has virtually nothing to do with the UK Chancellor. He is simply enacting the latest in a series of European Directives dating back to 2002 which seek to regulate the treatment for VAT purposes of digital goods and services.  The decision to levy VAT at the rate prevailing in the country of the customer's residence, rather than that of the retailer is not peculiar to the UK and will in fact apply across the European Union.

Second, the death of the actual 99p download seems unlikely. The most common location for music and video download stores operational in the UK - used by Amazon, among others - is Luxembourg where the current VAT rate of electronic downloads is 15% (apart from ebooks where the rate is 3%).

On a 99p download, that means that the retailer currently receives a fraction over 86p after VAT from which they have to pay for all costs including the music. If all costs stayed the same and 20% VAT were to be applied, that would increase the price of a download to just over £1.03, a long way away from £1.19.

Most industry watchers believe that the power of the 99p price point is such that as they have done in the past retailers and their suppliers will simply absorb the increase.

All in all, that Osborne clampdown and the supposed mortal threat to the 99p download look a little overblown.

Any impact of the European Directive looks set to be restricted to ebooks, which opens another can of worms entirely: why should ebooks be taxed at all when printed books remain VAT-free, a status of which the music and video industries can only dream?

But that's another story…

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