Why Amazon have an Exchange Rate of $1 = £1

Having spent twenty four years in the military (Royal Air Force) I’m quite aware of the most quoted oxymoron in use – military intelligence. Like many an oxymoron, it has a grain of ironic truth that covers a huge injustice, but it makes us smile and nobody really gets offended.

Over the last month or so I’ve grumbled about the apparently ludicrous exchange rate that companies such as Amazon appear to use, where suddenly there’s a one to one correlation between the price an item is sold for in the US (in dollars) and the price for the same item in the UK (in GBP). Given that often the said item has made pretty much the same length of journey, from China, it does appear to be a tad unequal.

However, it’s a while since I’ve travelled in the US so I frequently forget that we’re not comparing apples with apples here, even if we are discussing the iPad! I recall on my last but one visit, to Chicago with my wife, I had to advise on several occasions that she wasn’t to get too excited in the stores by the prices as sales tax was still to be added. And that’s a critical difference to Europe where our version of the State sales tax is not only added on the shelf, but actually has to be by law. For those of you from the US, if you visit the UK or another EU country, if the cash in your wallet is greater than or equal to the price in front of you, then you have all you need.

So, here’s a potted run through our tax system, from a purely British perspective, coupled with a belated if half hearted apology to the likes of Amazon for my unkind comments in earlier blogs (I still think the Mickey is being taken, but not as much as I may have indicated in previous blogs).

The main tax applied to goods in the UK is named VAT – Value Added Tax. Now if that doesn’t beat Military Intelligence as an oxymoron, I don’t know what could! It works like this:

Someone sells raw materials in the UK to someone else in the UK. The raw material has a cost applied to it that includes its value, any cost expended in handling and storing it and, of course, an element of profit. Let’s say for argument’s sake the raw material after all those bits costs £1. At this point VAT is applied to the raw material at 20%. Now not all materials and products attract this rate of tax, but the majority do. So the purchaser of the raw material pays £1.20 for the goods.

The purchaser does something to the raw material (let’s keep this really simple and assume no other material is introduced here), so they turn the raw material into something saleable, adding another pound to the cost. They sell this product to a distributor for £2 plus 20% tax and claim the 20 pence they paid to the Government back (in reality, nothing gets paid or claimed back in many cases – it’s a liability to pay that ceases when transferred). The distributor stores the product and eventually sells it on, now for £3, with the purchaser paying 60 pence tax, and the distributer claiming the 40 pence back. Eventually the product is sold to the consumer, say for £4 plus the VAT of 80 pence and, as in general the consumer can’t claim that tax back, that is what the treasury gets.

Why so complicated – well it ensures the Government gets its tax no matter where in the process the raw material gets to. If the distributer decides to not sell on the goods (or has bought goods nobody wants) then he still has a liability to the Government to pay the tax owed.

So when I complain about Amazon converting $200 devices into a retail price of £200 I guess I have to consider that the $200 is missing whatever the tax rate is for you guys in the USA right now. If we assume that $200 = £128 (tourist rate, I might add), then add 20% for VAT it comes to £154. So, yes, I’ve been a little unfair in previous blogs about the exchange rate, but not brutally so.

As a final element to the UK tax saga, there’s a couple of wrinkles I haven’t mentioned. First, as I noted above, not all items are rated at 20% - books, magazines and newspapers for example, are rated at 0% as that would be a tax on literacy, I guess. Unless they are e-books, e-magazines or e-newspapers, then it’s good old 20% VAT. But for the truly useful items in life, petrol, diesel and whisky for example, as well as VAT we have duty applied before the VAT (it’s always applied last, so we pay VAT on the duty tax as well as on the product), which is why we end up paying so flipping much for stuff over here (and it takes diesel to get the whisky to the stores, so that feeds in to the price). It’s a wonder we can afford to destroy our livers!)

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