#Budget2014 Clampdown on VAT from Digital Goods Could Spell End of 99p Apps

Budget 2014Customers buying virtual goods from the likes of Apple, Google and Amazon could soon be subject to 20 per cent VAT in moves outlined by the Chancellor George Osborne in #Budget2014.

The Chancellor wants to close a loophole so that downloads of apps, music and books are taxed in the country where they happen. That means adding 20 per cent VAT onto these purchases, bringing them in line with physical goods, a charge that is likely to be passed on to consumers. This move could spell the end of 99p downloads.

First reported by the Guardian, the measure is part of the Finance Bill 2014 and is likely to come into law from 1 January 2015. The move could raise an extra £300m for the Treasury, according to estimates.

“Businesses are currently asleep at the wheel over this issue,” said Jean-Benoit Berty, Head of Ernst & Youngs UK technology, media and telecommunications practice. “Many wrongly believe it to be a tax concern but in actual fact it will have a much broader impact across their business.

“In addition to the complexity and challenges of having to file tax reports across multiple countries there is also the pressing decision around how much of the price increase will be passed onto consumers, as well as the subsequent impact on revenue, profit and margin. Businesses must act now to assess the impacts across the whole business and identify critical next steps. Those who dont act now risk non-compliance penalties, loss of revenue and reputational damage.”

Tax avoidance

The Budget also details changes to corporation tax rules designed to clamp down on corporate tax avoidance, a practice often associated with the leading tech companies.

Article 2.199 of the Budget, in the chaper on Budget Policy Decisions, says that government will close down tax avoidance schemes, with immediate effect, involving other arrangements to transfer profits to a related company where the arrangements have a main purpose of securing a tax advantage. But the document says this will only bring in around £75m per year, a surprisingly low figure.

Tax avoidance is regularly cited as something that no country wants to lead on, for fear of being seen as uncompetitive, so George Osborne also gave his backing to global corporate tax reforms currently being drafted by the Organisation of Economic Cooperation and Development (OECD).

Jean-Benoit Berty, Head of EY’s UK technology, media and telecommunications practice, comments on the forthcoming VAT 2015 EU changes:

“Businesses are currently asleep at the wheel over this issue. Many wrongly believe it to be a tax concern but in actual fact it will have a much broader impact across their business.

“In addition to the complexity and challenges of having to file tax reports across multiple countries there is also the pressing decision around how much of the price increase will be passed onto consumers, as well as the subsequent impact on revenue, profit and margin. Businesses must act now to assess the impacts across the whole business and identify critical next steps. The most proactive businesses have already coordinated programmes making the necessary changes to their systems, relationships with third parties, and intermediaries, and the customer experience. Those who dont act now risk non-compliance penalties, loss of revenue and reputational damage.”