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Imagine there is no VAT on e-books and the price charged is £3.32. The seller collects £3.32 and is not required to pay anything to the Government by way of VAT. Then the Government introduces a VAT of 20% on e-books. Vat type legislation often requires that the price quoted to the buyer is the price inclusive of VAT. Governments as a general rule discourage price tags highlighting the amount of VAT on a transaction, for obvious reasons. They would much rather consumers see one inclusive price, though of course the amount of VAT is always readily ascertainable if not stated.
The seller then has the obligation to pay to the Government VAT of 20% of the sale price. If the price remains at £3.32 the seller can keep only $2.77 after paying to the Government VAT of £0.55. Most sellers of course choose to add the VAT to the price they had already set, though it is usually perfectly open to them to partially or completely absorb the VAT themselves. If sellers are actually working out their prices on a cost plus type basis with a margin, VAT is added to what the price would otherwise have been to achieve the effective margin. If sellers are simply using their costs to set the lower boundaries of their pricing but are in fact setting pricing by other means, for example their competitors prices, they will still seek to recover any amount of VAT they must pay. In a very competitive market some may choose to absorb some or all of the VAT.
When VAT is removed or reduced, this will often not be passed on to buyers. As has been said, the precedent has been established that consumers are prepared to pay £3.99 for the e-book. It's hardly surprising that sellers often choose not to pass the VAT savings along in the form of lower prices. Yes, they could in this case reduce the price to £3.32 and make the same profit, as some seem to have done. Only in a very competitive market would I expect most sellers to refuse such a windfall. And Big Publishing e-books are not a very price competitive market.
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