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Multi-£Billion lift to UK economy via digital industry

By Kathy Heslop |

October 28, 2013 | 8 min read

Significant impact for UK online businesses confirmed and a major blow to Amazon, Google & iTunes.

From January 2015, cross border e-services, telecoms and broadcasting will be subject to VAT in the country where the customer resides. An update to the EU VAT directive has been announced in order to stop online businesses capitalising on lower VAT rates in other EU countries, therefore ensuring that local citizens contribute to their local VAT system.

To which e-services does it apply?

The updated EU directive applies to telecoms and broadcast services, but when applied to e-servies, it will encompass all of the following:

Online gaming

Internet based teaching (distance learning)

Web hosting

Downloads of games, software, music, film and books etc

The current unfair playing field

At the moment, Amazon UK claim to be just a delivery service. They set up their UK selling operation in Luxembourg, where that are less than 200 staff. This way, they can legally charge UK citizens the Luxembourg VAT rate of 15%. However, they do not reduce their overall cost and therefore earn more margin. Conversely, a UK based business selling the same DVD online, does so at an immediate commercial disadvantage. The UK business has 5% less margin than Amazon, since it applies VAT at the UK rate of 20%.

In other countries like the Hungary where VAT is 27%, this equates to a 12% margin advantage for Amazon and shuts out various Hungarian based e-service purveyors. Again, Amazon does not reduce the price of the DVD, they just simply make more margin. The local economy gets no benefit either, since all the tax income is going out of the country and not contributing locally.

The storm cloud are gathering forAmazon

When I first examined the 'e-services' definition, I thought that it would be restricted to music and video downloads etc. However, a closer look at the way Amazon has defined and declared itself, makes them even more exposed to this new ruling. Their previous assertions and defence of their taxation practises will really catch them out now. Amazon have made over £10Bn in the last 5 years in the UK and paid 'no' UK corporation tax, since their revenue was all collected in Luxembourg. Nor did they pay UK VAT on sales made here, so the UK economy saw a lot of income drained away.

When questioned on this last year, the UK head of Amazon was quoted as saying that their UK business is just a 'service' and not a 'retailer'. UK revenue was less than £200m versus over £3bn goods sold into UK from Luxembourg. Christopher North branded their UK business as a 'delivery service' which only had one customer, Amazon Luxembourg.

That statement is pure gold dust now for HMRC - since 'e-services' are subject to this new EU VAT directive. (Someone might just have lost their Christmas bonus at Amazon).

So to date, with Amazon paying no corporation tax and no UK VAT, how have British businesses fairly competed with them? They simply haven't. It's been unfair and until now, was unchallenged.

A boost for the UK economy

Amazon's ‘clever’ statement declaring their 'service' position, has now got the HMRC rubbing their hands together and laughing all the way to the bank. Applied to Amazon and similar businesses, this will mean a multi-£billion lift in VAT revenue into the UK economy and will undoubtedly force further scrutiny and tax reporting for UK generated sales.

Overall, thousands of services will be caught by this tax change. I am sure that this is the tip of the iceberg and that the EU member states that signed up to this new directive have planned very carefully how to tackle the borderless Internet industry. Tackling sales tax first is very smart, in that it will declare the sale taking place in a certain country and this will make it easier to begin to assert that the rest is simply tax avoidance, not tax planning.

Online gaming may not directly charge VAT for its services but it is ultimately a 'service' and therefore it is going to be difficult for that industry to maintain that its revenue is not UK derived and therefore UK taxable. Big online gaming company bosses have got away with moving to Malta, Gibraltar and The Isle of Man to date, but I am quite sure they will be keeping a close eye on this changing position.

I feel that this move is not only economically positive for the economy, but ethically so too. If we all head off shore and the consumer gets everything cheap, the country suffers until regulation can catch up. Let's face it, if over the past decade, all online businesses, services and gaming that were trading in the UK, (selling to the UK population) had been taxed in the UK, this country would have had tens of £Billions more in its economy. This would have drastically reduced the government’s increased debt deficit. Apply that theory on a global scale to the big monopolists - Google, Microsoft, Apple, Amazon with their huge cash stock piles and limited cash distribution, and you may conclude that there would not have been a recession if better taxation rules had been in place.

Major impact

This major change for the online industry will impact pricing strategies, gross margins, operating costs, market reach, online marketing and competitive position for businesses across the world. Large American businesses in particular will feel the heat since they currently find it easier to structure their European operations for tax efficient cross-border trade, more then native European businesses.

The changes will negatively impact the big monopolies like Amazon, iTunes and Google, since their gross margins will largely reduce. This is positive for local businesses in smaller territories, who will now be able to compete on price.

Local knowledge now key

At present, consumers in many territories accept a lack of local language service provision, in exchange for cheaper prices from the big monopolists. The good news is that now a more even playing field will enable quality to come to the surface. Companies will also have to be familiar with local tax regulations and also be more culturally aware about how to do business properly in those territories.

Defining online sales in other countries as locally occurring and taxable, effectively declares them as sales in that country, and with that will come all the local expectation of localised customer service and consumer rights.

This is a wake up call to all online businesses that if you want sales from other EU countries from Jan 2015 onwards, you need to get ready to trading responsibly.

The administration could be considered onerous, since all online businesses selling abroad need to register for VAT in each EU country. However, the HMRC will launch MOSS (Mini One Stop Shop) in October 2014 enabling convenient sign up on one online form. Quarterly returns will be more complex, but regardless, it is clear that new internal resource will need to be dedicated to EU trade going forward anyway.

Final comment

I raised this issue in a prior blog over a year ago and I am thrilled it is finally being tackled. Overall, it's a great day for the online retailer and its time for the big boys to behave. This is undoubtedly going to lead to a much more level playing field and importantly, put more UK monies back into our economy.

It is only the beginning of a new approach to borderless trade and it won't end here. More change will follow. However, I can only see it as a good thing on both economic and ethical fronts.

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