eBook VAT & What This Means for Selling Direct (Brace Yourself)

Following on from my earlier post, I posted a question on Kindleboards about direct selling and the question of tax came up. That small question prompts a big answer. This is tax we're talking about. It's a tricky subject and I was steering clear of posting anything about it, however, I am willing to outline my own circumstances to add clarity for purposes of selling direct and my experiences with it.

I am a British citizen registered with HMRevenue as self employed (sole proprietor). I am not VAT registered. I am in no rush to register as my turnover selling direct is nowhere near the £73,000 plus threshold for the reporting year.

As I provide goods that are "taxable supplies" I would have to register for VAT if either; my turnover for the previous 12 months goes over the VAT threshold (currently £73,000) or if I thought my turnover would soon go over this limit (within 30 days). I can opt to register for VAT even though I am below the VAT threshold. There are benefits to this. It is best to keep an eye on the VAT threshold as it may change and any change will be announced in The Budget.

VAT must not be charged by a business that isn't registered for VAT. I am below the VAT threshold and am not registered for VAT. However, this means I CANNOT claim on input tax! And should I ever exceed a turnover of £73,000 I am obligated to register for VAT and send this information to HMRevenue alongside my normal tax return. If I were a registered VAT business, and my imput tax (the VAT I pay for goods and services) was greater than the output tax (the VAT consumers pay on goods and services) I would get the difference between these two tax amounts back from HMRevenue ... commonly known as a tax rebate.

As a side note, when selling via a distributer (Amazon, Smashwords, CreateSpace, etc) they are obliged to report royalties to the IRS. This is why we must obtain a US Tax ID. The tax-withholding rate applied to royalty payments made to residents outside of the US is 30%. As the UK (and other countries) have treaties with the US this rate is reduced to 0% when you supply your distributor with your W8-BEN as we are required to pay taxes to our own government. The W8-BEN requires a Tax ID to be completed (don't you just love it!) and to get a US tax ID you need to complete a W-7 form (I know, you're loving it, you're loving it hard!). I'm in the middle of this process and to be blunt it's a butt ache.

Right. We need some general background on eBook VAT. The EU agreed member countries could reduce e-book VAT on "any similar physical medium that predominantly reproduce the same textual information content as printed books" in January 2011. This means that in Jan 2011 the UK could reduce their VAT on e-books or GET RID OF IT ENTIRELY without the EU sticking their nose in.

Great right? In this difficult economical climate how nice would that be. Well, they haven't reduced it. The VAT rate on eBooks in the UK is 20% and it sucks. VAT needs to be taken into account when selling eBooks direct though it should not be a concern until you breach the VAT threshold (if you do that you obtain godling status in my eyes). VAT registered companies will either show it to you separately or will make a note that says "price includes VAT". Look at a receipt or a small business website ... even on Amazon UK below the sale price they have a statement.

Yes. That's right. You get ONE picture. *giggles*
My eStore does have the ability to automatically add a relevant VAT charge to the consumer by country. Post registration (if I decide to register for those benefits), if my volumes ever got to a level where it was a significant loss by not charging VAT on top of my desired price point, I could implement VAT charges to consumers in a few clicks.

Allow me to break down a single eBook transaction.

Selling Direct with My Website (As A VAT Registered Business)
My list price for Demon Dark is £2.99
VAT on eBooks in the UK is 20%
The VAT is calculated at £0.598
The sale price of Demon Dark becomes £3.59 on my website.
My royalty rate is 100%
This gives me £2.99 per unit (minus payment supplier transaction fees) because THE CONSUMER paid the VAT charge

Selling Direct with My Website (As A Non VAT Registered Business)
My list price for Demon Dark is £2.99
I am under the £73,000 threshold and do not need to be VAT registered (though I can be for some benefits). VAT must not be charged by a business that isn't registered for VAT.
The sale price of Demon Dark becomes £2.99 on my website.
My royalty rate is 100%
This gives me £2.99 per unit (minus payment supplier transaction fees)

Has nobody wondered why when Amazon Price matches to meet iBookstore why we in UK get irritated? Apple deducts VAT from the list price we set to get a sales price the consumer sees ... so for example my earnings via Smashwords are 60% of of the price point I set minus the relevant VAT. Amazon price match thinking "ooh, lower price" when in actuality, I'm already getting less money per unit via Apple as I am absorbing the VAT. So as an author I get screwed front and back. Though I am not sure of this is just via Smahwords or direct via iTunes connect as well.

As a consumer buying an eBook from a VAT registered business, I pay 20% VAT whereas if I bought the same book in print from that retailer I would have paid 0% VAT. Because eBooks are generally cheaper than printed books, consumers are not that bothered - yet. As ebooks become more popular this will become a real problem for the UK, and if the government does not take their finger out it will severely stunt the growth of eBooks once consumers put two and two together to get four.

Consumers buying direct from authors not only give the author more money for their work, and experience something much more personal, they also pay less for their eBook if the author is below the VAT threshold.

My dream is not to be a millionaire, but to be able to support myself and my family doing what I love; writing. I don't need millions to do that, and authors who can develop a loyal and sustainable fan base via retail and direct sales can enjoy that dream.

Can you imagine it. *sigh*

Now, I am NOT saying abandon Kindle, iBooks or Nook. No way. Connivence is bliss. I am saying diversify. I buy my books from Kindle, Kobo, iBooks, Smashwords, and I would buy direct if it was offered to me. Choice is the spice of life.

No doubt I have forgotten to mention something that will bite my bum, but I hope that begins to explain VAT for the purposes of selling directly, and to give you a better idea of what knowledge is required. It seems daunting, but once you have full understanding, it's no more difficult than any other learned skill.

Quite frankly, what my government are doing is *badword*. They are twiddling their thumbs when other countries in the EU are taking advantage of the reduced rate. Print books in the UK are 0% VAT yet for some mystical reason unbeknown to the world they categorize eBooks as digital products rather than simply adding them to the books category.

If in future eBooks are exempt from VAT, the registration will be unnecessary for authors who only sell eBooks. This would make it less frightening for authors to consider selling directly.

If you get it (and care) you can sign the E-BOOKS VAT ABOLITION petition here http://submissions.epetitions.direct.gov.uk/petitions/114

IMPORTANT: I am not a tax expert and before you do anything get an accountant or have a conversation with HMRevenue. It's business, and needs to be treated as such. Be fully aware before doing anything. :)

You can visit the HMRevenue site for more information Hmrc.gov.uk. Direct.gov.uk is good too.


  1. Anonymous16.11.11

    Great post. I have this fun VAT stuff to look forward to! Lucky me lol ; ) x

  2. A very interesting, and informative post. Thank you. This has helped me suss out what I need to do when starting my own e-publishing company in the UK...

  3. Great thoughts you got there, believe I may possibly try just some of it throughout my daily life.

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  5. Anonymous12.9.13

    Thanks for the breakdown!...no, Many thanks! :)

  6. Every business supplying taxable goods or services must register for Value Added Tax upon the turnover reaching the statutory threshold. The right advice on VAT Returns enable a business to make the right choices from the outset and on an on-going basis for Value Added Tax registration, VAT schemes, the VAT rate application and claim.