#78 Newsletter Editorial - The Money Issue

21 Mar 2011

With a new budget just a couple of days away, it seems a good time to draw together some growing issues around the levying of VAT on music.  As tough a proposition as a tax cut might be to a cash-strapped Exchequer, we ask if the time might nevertheless be right for the industry to lobby for a Europe-wide VAT exemption on music.

On the one hand there is a rising groundswell of opinion that the government may use the occasion to close the Channel Islands VAT loophole.  Originally created to help flower sellers and to cut Royal Mail red tape, it allows goods dispatched from the islands under the value of £18 to avoid VAT charges.  The issue, originally raised by George Osborne in 2007, was debated in the Lords earlier this month with Lord Newby (Lib Dem) mistakenly claiming that it affected 90% of all CD sales in the UK.

The Entertainment Retailers Association (ERA) has confirmed that figure as unrealistically high – 90% of CDs sold by “mail order” may go through the Channel Islands but only 25% of all CDs sold are by mail order so that’s, at most, 22.5% of all CDs sold. And given that people making multiple purchases still have to pay VAT, the real figure is probably under 20%.  Still, that’s a lot of CDs arbitrarily exempted from VAT.

The Federation for Small Business recently complained to the EU about the effect on independent retailers, who have found it hard to compete against mail order firms operating from the Channel Islands.  Their concern is shared by AIM and IMPALA, who believe it is an unhealthy market distortion that unfairly disadvantages independent retailers.

Almost all the major retailers – including HMV, Amazon , Play, Tesco , ASDA  and Sainsbury’s – run their mail order operations from the Channel Islands, so closing down the loophole would mean VAT is added to that 20% of CD purchases.

And with some estimating that a good 50% of an indie label’s CD sales are through Amazon and Play – and hence VAT exempt – that’s a big consumer saving waiting to be taken away.

Cooking Vinyl’s Martin Goldschmidt takes this as a reason enough to suggest that the record business ought to lobby for music to be treated as a cultural good, like a book, and be exempted from VAT.  After all, why should Miles Davis’ Kind of Blue not be considered a cultural good, when a newsagent’s top shelf copy of Razzle is?

At this point many seasoned music business execs might roll their eyes.  They’ve tried this before and the government is unlikely to jettison a valuable revenue stream in these austere times.

But there may be light at the end of the tunnel in the form of a wide-ranging European consultation on the future of VAT.

The recording industry at a European level, as represented by both IFPI and IMPALA will be lobbying for VAT reductions for both physical and digital music, pointing out that there is no equivalent sales tax on digital content in the USA, a fact that might help explain why the digital market is more mature over there.  They will also be lobbying the EEC to allow member states the freedom to individually create VAT exemptions for CDs as a cultural goods.

While countries like France are likely to support these moves, changes will require unanimity across member states, so the support of the British government would provide a much-needed fillip.

With the consultation open until the end of May, recommendations not likely before the end of the year, and negotiations expected to continue well into 2012, there’s plenty of time to make our voices heard.

With the government keen to help the content industries, and ERA already in favour of lowering VAT on music, maybe it wouldn’t be all that pie-in-the-sky for the UK business to decide a unified position and get behind it.

Editorial by Sam Shemtob

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