An online sales tax: a valid proposal

As indirect tax advisors to a wide range of different stakeholders in the retail sector, two questions that we often hear against this background are:

1. What action is the UK Government taking to prevent the decline of the UK’s high streets?
2. Does the UK tax system fairly reflect the modern consumer’s shopping habits?

When discussing both of the questions, a common theme that emerges is the difference in the amount of business rates that e-commerce retailers pay versus their high street equivalents. Some surveys have suggested that certain high street retailers may be paying (on average) over £2.50 more (per every £100 of revenue) in business rates compared to their e-commerce equivalents.

In a sector of the UK economy where margins can be incredibly tight, such an imbalance can have a significant impact on a retailer’s margins and be a critical factor as to whether that retailer flourishes or struggles. The concept of an online sales tax (OST) has emerged as a potential solution to address this imbalance and has attracted opinions from various commentators – with most commentators hoping that the introduction of an OST would enable the amount of business rates paid by high street retailers to be reduced.

The concept of an OST has gathered substantial support. One outcome of a recent UK Government review of business rates was to recommend the UK Government consult with the retail sector about the introduction of such a tax.

Consequently, in February 2022 the UK Government began consultations with the retail industry to further consider the pros and cons of the introduction of an OST and whether it would bring about the desired rebalance to this sector. As part of this consultation, the UK Government has identified a number of factors that it would like to consider prior to approving the introduction of the OST, including the following:

• What is the definition of an online sale? For example, would sales made via a phone be classed as an online sale?
• How will an OST function in regard to cross-border transactions? For example, would a non-UK company making online sales to consumers located in the UK be caught by this tax?
• What would be the scope of an OST? For example, would click and collect purchases be caught by this tax?
• What would be the role of intermediary marketplaces in the levying of an OST? We have seen more and more responsibility being placed on intermediary marketplaces to ensure that VAT is accounted for on supplies made via the marketplaces, so will similar responsibility be placed on them in relation to an OST?
• At what point would an OST be levied? Would this be a tax levied on the consumer or on the vendor?
• How will businesses be required to report and pay OST collected to the Government?
• Would there for an OST registration threshold? For example, most businesses do not need to register for UK VAT until they have taxable revenue of £85k.
• The consultation is also considering whether the introduction of an OST should expand to more than just retail purchases by consumers. For example, should online sales made by wholesalers also fall into the scope of the OST.

Given the large number of retail sector stakeholders, it is expected that there will be a variety of proposed solutions to the above issues. Many stakeholders may be left unsatisfied by the conclusions reached in the consultation.  

If, for example, we assume that retailers will pass on the cost of an OST through price increases to the consumer, consumers who have switched from shopping on the high street to shopping online (whether in whole or in part) may react badly if their online purchases are suddenly to increase in price – especially in the current economic climate with already high levels of inflation. It further does not appear to be inevitable that a corresponding reduction in business rates following the introduction of an OST would lead to a lowering of retail prices on the high street.

It is clear that there are still a number of considerations that need to be resolved prior to the introduction of an OST. As we have further seen recently with the plastic packaging tax, the introduction of a new tax into an already extremely complex tax system is far from easy (providing a number of challenges for both taxpayers and HMRC) even if it ultimately benefits high street retailers. 

Author

Michael Read, Indirect Tax Manager

This article is featured on Pannone Corporate.