Amazon VAT row threatens higher ebook prices

Amazon may lose a tax loophole it has enjoyed since the beginning of the year, which could lead to a rise in the price it charges for ebooks in the UK.

The online retailer, which is based in Luxembourg, has paid VAT at three per cent on the sale of ebooks after the country slashed its tax rate in January.

Read more: Amazon and ebook reader news

Although UK customers have benefited, a contract seen by the Guardian found that Amazon still forces British publishers to remove the UK VAT rate of 20 per cent from the cost price - a practice the EU will seek to close.

The VAT loophole has helped increase Amazon's profits adding an additional profit of £1.38 for every £10 ebook sold in this country.

Ian Hyde, a tax law specialist at Pinsent Masons, said: “This dispute illustrates the difficulty in creating a single consistent VAT regime across the single market.

"If there are VAT differences between member states or between different routes to market, then it will distort business behaviour. New rules – and new products – create anomalies.

"The EU is seeking to correct the ebook anomaly by making Luxembourg increase its VAT rate on ebooks. This will help other ebook suppliers in the UK by removing the benefit in routing sales via Luxembourg but it does nothing to address the bigger anomaly: why are ebooks subject to VAT when printed books can be zero-rated?"

Now the European Commission has said the practice of giving lower VAT rates for ebooks and digital services is unfair and incompatible with EU law. It has given Luxemburg until the end of November to increase its VAT rate on these goods to 15 per cent.

However the Commission must also get all 27 member states to agree to this. This could cause problems because France also relies on this lower rate of VAT. UK customers are not expected to see any effect for a while as Amazon is also expected to contest the ruling, and the issue could end up in the European Court of Justice.