It’s no secret that tech giants make a small fortune by exploiting tax loopholes in the UK.
In the recent budget, Osborne announced a £300m tax raid on companies like Apple and Amazon, headquartered in Luxembourg.
These tech giants have been able to get away with paying the duchy’s meagre 3% VAT rate on digital goods, even when selling to consumers in the UK.
Value added?
Under these new regulations, in effect from January 2015, tech giants based in Luxembourg will have to pay that standard 20% VAT to the Treasury.
HMRC could recoup as much as £300m from tech giants. Apple, which makes around £1bn in the UK, just through iTunes and digital stores, could pay the lion’s share of this.
It wouldn’t be surprising if Apple and other tech giants passed this added tax on to their consumers. So your favourite Rihanna single, currently available from the iTunes store for 99p, could now cost £1.16.
Wider impact
Caught in the crossfire between the tax authority and tech giants, news outlets will also pay their share of VAT on digital subscriptions of their products, under new regulations.
This could be crippling to the news industry, which is already in dire straights and relies on revenue from digital products to finance the flagging newspaper business.
However, startups and small businesses, which struggle to match the tech giants’ rock-bottom prices for music, movies, eBooks, games and other digital products, could benefit from a fairer system of tax.
David vs Goliath
With large corporations who can afford to offshore their companies now under similar tax obligations as smaller startups, some companies are welcoming the Chancellor’s announcement.
Ed Averdieck, Founder of UK startup CueSongs, told Tech City News that the impact on his music startup would be “positive to neutral.”
We pay UK VAT on all our transactions already.
Only the bigger companies that have offshored their headquarters for tax reasons. You cant do that if you don’t have people in Luxembourg.
I think this benefits small companies because it levels the playing field. No longer can the big companies have a tax advantage.
Playing by new rules
Efe Cakarel, Founder and CEO of MUBI, a startup based in Silicon Valley, but with a significant base of consumers in the UK, explained how the Chancellor’s move would affect his business.
This is obviously not good for MUBI since we set up a Luxembourg entity three years ago to take advantage of the lower VAT tax rate there.
But you can’t blame the UK for closing this “loophole” that takes money out of the UK tax system.
The era of paying no tax for companies like Apple, Amazon and MUBI is over and we just have to play by the new rules.
All bark and no bite?
David Thompson, Partner at DLA Piper, and a tax expert explained the effect of the Chancellor’s new measures.
It might look like a sudden backlash against the tech giants, but it isn’t.
Currently a business based in Luxembourg can charge the lower rate of VAT in that country on music downloads (and certain other electronically supplied services) even where the consumer is based in another EU state. That loophole will end on 1 January 2015.
Long time coming
However, he explained this measure has been expected for some time, and “brings the position of sales to private consumers into line with the position for ‘business to business’ sales.”
Getting the member states to agree how to identify and collect the VAT on so many transactions was what had delayed the change for this long.
Businesses which have not yet considered the impact will have to do so now.
CD ripping to be legalised
It has also been announced that from June CD ripping will be legalised in the UK.
A tweak in copyright law will allow those who own CDs to rip them onto their computers, but only for their own use.
Ripping has been common practice for many since the emergence of mp3 players as users wanted their already owned CD in digital format. It is unlikely the move will have substantial consequences for the industry.
Changes to the law will not affect the ripping of DVDs, which will still not be allowed.