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It’s CMU budget news – VAT

By | Published on Wednesday 23 June 2010

The down side of Osborne’s tax shifts, of course, is the VAT increase, which impacts in particular on any music business selling directly to consumers, so retailers and ticket sellers in the main. VAT will go up from 17.5% to 20% at the start of 2011.

It is expected that music sellers, like retailers in most other sectors, will simply pass the VAT increase onto their customers making everything more expensive. The tax increase therefore won’t directly impact on the profit margins of music retailers and gig promoters, but will mean the average person has less expendable income, and there are concerns that music products are just the sort of thing cash-strapped consumers might do without.

Rob Hallett, President Of International Touring for AEG Live, had already told Billboard, in an interview earlier this month, that he feared a 20% VAT rate. Retailers passing the tax increase on to their customers, Hallett reckons, could leave the average consumer £20-30 a week worse off. And that, Hallett notes, is the price of an average gig ticket.

Hallet will, however, be pleased that the VAT increase is being delayed until 4 Jan next year. In the same interview he said that a sudden leap in VAT rates could hit his company even harder, because they would be committed to contracts with fixed ticket prices that wouldn’t account for any tax increase, meaning they would have to take the hit when a higher amount of that ticket price has to go to government. Six months notice of the increase should enable them to reduce the impact of any contractual commitments.

HMV top man Simon Fox will also presumably welcome the extra notice of the pending VAT increase. When the Labour government cut VAT rates down to 15% in a bid to increase consumer spending, and then switched it back to 17.5%, both with relatively little notice, he complained about the logistical challenge of suddenly having to change pricing in all his stores. He also wasn’t impressed that the switch back to 17.5% happened on New Year’s Day, observing that “New Year’s Eve is not the day to have to re-price thousands of products”. At least this time he’ll have a whole two days after the New Year festivities to switch the price stickers on CDs and books in his HMV and Waterstones shops.

Of course, in one domain HMV will do very nicely out of the VAT increase. As much previously reported, HMV are one of a number of major player retailers who manage to charge no VAT on CDs bought via their mail order websites. They dodge paying the sales tax because of a tax loophole that exists when you base your mail order operations on the Channel Islands, which are confusingly within the EU’s customs zone but not under the UK’s tax regime. The tax dodge applies to any goods that retail for £18 or under.

This tax loophole has been much criticised by the independent retail sector, whose high street shops or mainland-based mail order operations are at an automatic 17.5% disadvantage to HMV, Tesco, Amazon, et al, making it very hard to compete. Many, of course, have simply given up and gone out of business. Indie sector campaigners believe the way the mail order operators use the tax loophole actually constitutes an abuse of European tax laws, and are now fighting the dodge (and the UK government’s failure to end it) through the European courts.

Given that in 2006 the then Labour government itself said it thought the loophole cost the government £85 million a year in tax revenue, you’d have thought the new frugal coalition government would have looked into closing it. As it is, with VAT going up to 20%, those bigger retailers who enjoy the benefits of the tax dodge will be at an even bigger advantage to independent music sellers, more of whom may hit the wall as a result.