Online sales tax – would it work?

Recent reports suggest that Chancellor Rishi Sunak is considering introducing an online sales tax as a ‘sustainable and meaningful revenue source’, amid mounting concern about the collapse of the high street, as Britain recovers from the Covid-19 pandemic.

The Treasury has highlighted concerns from retailers that business rates place an unreasonable burden on the high street, as they effectively penalise businesses with physical premises because online rivals do not need to rent “high-value” properties. The Treasury has stated that the Covid crisis “has had a significant impact on how business is done” and that the government must act to make sure that “the tax system raises sufficient revenue” to help bricks and mortar retailers to compete.

There could be two models that the Govt is looking at: 1) a straightforward levy of around 2% on sales of online goods, which would raise around £2bn a year or 2) a mandatory charge on consumer deliveries which would form part of a campaign to cut congestion and toxic emissions.

Is the ‘high street’ model broken?

The online sales tax in the UK has largely been discussed in the context of ‘levelling the playing field’ between physical shops and online retailers, particularly with regards to business rates. However, within the Retail sector, it is not widely viewed as a viable solution as it is unlikely to directly benefit or impact on the costs borne by smaller and bricks and mortar retailers.  Business rates have, of course, been suspended in the short term and this has been widely welcomed but a longer-term solution to the issue still needs to be found.

If the sales tax is passed on to consumers, it remains questionable whether it has been set at a level which would override the benefits of shopping online, particularly the convenience aspect. The recent lock down has, through necessity, introduced online shopping to traditional high street shoppers and it is likely that many of these will continue to shop online in future, even if only to a limited degree.

If a key driver behind introducing an online sales tax is to persuade consumers to return to the high street, then conducting some form of analysis to confirm the effectiveness of such a tax would be required before going further.

Other factors to consider

If the EU’s proposed directive requiring online platforms to report the level of online sales (i.e. DAC 7) gets approval, the tax authorities will have more information on online sales, which could be an underlying driver for the tax, as there are likely to be online sales in territory  that are not currently taxed notwithstanding any  obligation to register for VAT.

There is a strong indication that the VAT registration threshold will be reduced in the years ahead which would bring the UK in line with most other countries. The Government has consulted with interested bodies to try to find a solution to the issues surrounding business rates, but no viable solution has been agreed. One alternative could be a 1% rise in the rate of VAT, the revenue from which could be directed towards a reduction in business rates.

It is also rumoured that the Government could be considering a capital values tax to replace business rates, based on the value of the land and buildings, and paid by the property owner. Were a capital values tax to be introduced, it seems likely that landlords would ultimately try to pass it on to the lessee either by increased rents or other charges.

Ultimately, the demise of the high street cannot be wholly blamed on the rise of online shopping. Consumer expectations of the ‘shopping experience’ have also changed and bricks and mortar retailers must be versatile and adaptable to ensure that they are able to move in line with consumer expectations.

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Please get in touch with David Hackett, Tax Director, if you need support, or alternatively contact us here.

This update originally appeared on the website of our colleagues at MHA MacIntyre Hudson