Tax change could hit music and e-book downloads

The changes to the prices of downloads will apply across Europe

Digital downloads could be hit by price hikes early next year as they become subject to UK tax rates.

Currently download prices include a levy based on taxes in the country where a business is located.

Big web firms have sited offices in Luxembourg so they can charge at tax rates lower than the UK's 20% VAT.

Closing the loophole could bring in revenues of about £300m in its first year, according to government estimates.

The tax change will apply to downloads of films, music, e-books and smartphone games.

Chancellor George Osborne mentioned the plan to change rates in his Budget speech last week. The plan was first set out in the government's Finance Bill and the change will come into force on 1 January 2015.

The change is part of a wider European Union push to ensure taxes are levied in the country where goods and services are consumed rather than where a business has its head office. The proposal to shift rates in this way was first made in 2008.

Music, book and smartphone game downloads are likely to be affected by the change as the UK VAT rate of 20% on those goods is higher than those in Luxembourg where music, film and game downloads have a 15% tax rate and e-books 3%.

In total, about 34,000 firms will be affected by the change, estimates the Office for Budget Responsibility.

However, the tax switch is likely to have the greatest impact on purchases made via Amazon's web store and Apple's iTunes. It is not clear yet whether the change will mean an increase in prices. Neither Apple nor Amazon has commented on the news.