VAT change could hit 99p downloads

A change in how VAT is taxed could mean the end of the 99p music download from digital stores like iTunes and Google Play.

Announced as part of the Budget last week, the Chancellor has put into place new legislation, coming into effect next year, that would require online retailers such as Apple and Amazon to put VAT on media downloads based on a customer's location.

Both Apple and Amazon have European headquarters in Luxembourg, which enables them to place lower VAT on music downloads from their online stores. Under this new scheme however, VAT on downloads would be based on the location of the customer, so buyers in the UK would pay 20% as opposed to 15% in Luxembourg.

It is still unclear whether or not any increase would be passed onto consumers or absorbed by publishers, but the end of the 99p download could have an impact on digital sales, which now account for half the total sales figures in the UK, according to official figures.

The move forms part of a Government plan to get tougher on multinationals, and the change would see the current 99p rate for a single music download increase to more than a pound from January 2015.

During his Budget address to Parliament, the Chancellor George Osborne said this increase formed part of 'international efforts to develop tough, new global tax rules'. Forecasters suggest the change could generate up to an extra £300m in tax revenues in the first year of its enforcement.

A 2012 report by Greenwich Consultancy found that the UK was losing more than £1.5 billion a year in VAT on digital services like music and video downloads.

Last year, Apple generated over £1 billion in revenue through sales of music and apps on the iTunes store. The California-based company has declined to comment on the announcement.