Wednesday, 31 December 2014

VAT Hike on eBooks - from midnight

Tomorrow, January 1st, the VAT rate on eBooks is changing. It’s changing because the rules used to be that VAT was charged where the vendor was which meant retailers could be legally resident wherever they liked (within the EU) and pay VAT based on their location. This was called the ‘Place of Supply’ rule.

Naturally, they chose the countries with the lowest VAT rates. For a few years now, that’s been Luxemburg at 3% VAT on eBooks.

From January 1st, the Place of Supply rule dies (as far as eBook publishers are concerned). The new rule is ‘where the customer is’ under Council Implementing Regulation (EU) No 1042/2013).
That means sales of eBooks are going to attract variable VAT rates in all EU member states. 

Thankfully, it’s up to retailers to levy this on behalf of publishers (so Amazon collect and pay it). If they didn’t, it would make selling eBooks ridiculously complicated and decimate low volume sellers with high admin costs (as well as potentially making <£81k turnover businesses lose UK VAT exemption).

So, for publishers this means a change in how they price. To take Amazon as the obvious example, the change means publishers will give Amazon ‘Inclusive’ rather than ‘Exclusive’ pricing.

So today, I might be £1.93 exclusive. With 2014 VAT at 3%, that’s £1.99. I’d then get paid £1.93 minus the delivery fee (circa 5p per copy for most average length eBooks with no extraneous images) and minus Amazon’s cut. That’s about £1.31 to the publisher per £1.99 sale.

From tomorrow, I could be pricing at £1.99 and paying 20% VAT. Thus Amazon would work backwards [(£1.99*0.8) – Delivery Fee]*Royalty rate. So £1.99 becomes £1.59 exclusive of VAT. Then the delivery fee comes off the top to get £1.54. Then Amazon take their cut which leaves about £1.07 per £1.99 sale for the publisher.

That’s a loss of roughly 18% of net royalties on UK sales. Small publishers will therefore be left with a horrible choice – hike their prices by passing on the added tax or cut margins.
Obviously, we’d all like to see prices stay the same. But to keep the same income in 2015 as in 2014, you either sell 20% more or up your prices by about the same.

Except, it doesn’t quite work out that neatly. Prices are almost always going to end in that magic .99. 

It doesn’t look ‘right’ seeing products priced anywhere else.

But £2.99 is a huge hike from £1.99. The question will be ‘Can you maintain the same sales volume at the higher price, and if not, how much do you lose?’

It’s all well in good asking for £2.99, but if you now make half the sales you did before then the total income will fall (and with eBooks, there are no ‘unit costs’ as sunk costs like production should be amortized over time which means there is little downside to volume).

Static pricing means a need for greater volume to offset the per unit loss. For low sellers (e.g. non fic, older titles, niche fic) where the demand curve isn’t so resilient, this might be challenging.

I however suggest small publishers take heart. That 24p you’re going to lose on the £1.99 sale? It’s much less than HaperCollins & Penguin RandomHouse have to eat on their £7.99 books. A £7.99 book (assuming static pricing) will go from a mere 24p in VAT per copy to a whopping £1.59 which makes it much more likely that prices from big publishers will have to go up.

The observant among you might be thinking ‘but Amazon will be swallowing some of the rise, won’t they?’ and yes, they do. Tax comes off before the retailer/publisher split, so on a 70% royalty category Amazon get to cover 30% of the VAT hike (or 5.1% of the total). On 35% royalty sales (i.e. those prices under £1.99) Amazon will be taking a 65% hit on that VAT hike.

That all makes it much easier for small publishers to tank the hit.

And the best part is, Amazon are automatically hiking prices by the appropriate percentage on Jan 1st. Those who change back down will get an immediate price advantage over those who do not do so. To make a change, just login and set a new, VAT-inclusive, price for all EU regions (but note that not all countries have their own price – Ireland will use the UK price as it does now, which can make pricing look funky; alas, there is nothing that you can do about that as there is not yet the granular control required to normalise everywhere).

I’ll be making the change in about an hour and fifteen minutes. Hopefully, Amazon will process that before consumers wake up tomorrow. Sure, I’ll make a little less per copy but now the differential between my book and the others vying for purchases is going to be even bigger which should mean more overall units.

It’s up to you how you price, but in the long run more readers is almost always better than less. 

Within genre fiction at least, volume pricing is here to stay.

NB - this all applies to eBooks only. Print has never been subject to VAT (in the UK at least) and that isn't changing. A few people have asked why print is exempt but eBooks aren't - I don't have a good answer for you there. The technical response is 'governments have a limited number of exemptions from EU VAT rules and ours does not choose to use one of those on eBooks'. In short, it's up to the Chancellor of the Exchequer to get with the times and either VAT print or exempt eBooks. It is wholly absurd to tax them differently.

1 comment:

  1. It looks like retailers are lagging a bit. Pricing didn't change at midnight, though the new VAT rate is now in effect. I guess we'll check again in the morning.

    Night all, and Happy New Year!