A proposal buried in the depths of the Treasury’s Budget paperwork to increase the rate of VAT on consumer electronics to 20% has caused outrage among international technology suppliers and native software developers alike.
In a section entitled “Support for the knowledge economy”, paragraph 8.86 of this year’s Budget Report sets out the rationale for a rise in the standard 17.5% rate of VAT to 20% for consumer electronics to be implemented in a post-election Finance Act.
The phenomenal success of gadgets such as netbooks, iPods and iPhones has put a multi-billion pound dent in the UK’s balance of payments deficit, the report notes. “The supplementary VAT rate would counteract the structural imbalance that has arisen in the electronics supply industry while enhancing the UK tax base. The additional funds raised would be directed towards creative, high technology businesses through initiatives such as a tax relief package for the video games industry,” it argues.
The controversial new tax proposal is the latest and most radical expression of the social inclusiveness ideas that underpin the government’s Digital Britain initiative. “A divide has emerged between gadget ‘haves’ and ‘have nots’ that threatens to disenfranchise large sections of lower income and socially deprived groups. This digital dislocation is likely to be exacerbated as mobile technologies and commerce mature,” the report notes.
But technology suppliers and software developers are having none of it. “This arbitrary and discriminatory proposal could do untold harm to the UK’s competitiveness,” warned Andy Dutch, a representative of the Association of Silicon Technology Industries.
“Consumer electronics is a fast-moving industry that drives innovation across a broad range of industries and sectors, from telecommunications and finance right through to entertainment. Suppressing demand in this way will starve the UK market of leading-edge technologies and cripple developers who rely on these platforms for their success,” said Dutch.
“This VAT scam totally flipped me for 360,” commented Ray Tracy of leading games developer Virtual Ice. “For many gamers, consoles are like an extension of their physical body. It’s stupid - like putting a tax on somebody’s thumbs.”
Tracy added that the proposed VAT increase would completely nullify the £2.5bn industry support package announced separately in last week’s Budget. “Every extra pound that goes to the government will be one less for customers to spend on software. Forget ‘joined-up government’ – once again New Labour has shown that when it comes to technology, it has no idea what it’s doing. The VAT increase will cripple us and I sincerely hope gamers take their Wii-venge at the general election.”
According to Digby Sheen from consumer market analyst Ramtech, the so-called iTax will have less impact on iPhone and iPad users than buyers of rival products. “Apple customers are already used to paying premium prices for their technology, so the VAT surcharge will merely add to their sense of superiority and exclusivity,” he said. “And it’s not going to be difficult for them to work out how much extra they’ll have to pay – there’s sure to be an app for that.”