USA Proposal for possible “Online Sales Tax"
In February this year, HM Treasury issued a consultation on the possible introduction of an Online Sales Tax (OST), under the auspice of “Assessing an option to help rebalance taxation of the retail sector”*.
The reasons given for publishing this consultation are the decline in footfall in bricks and mortar shops and the impact this has on the “high street”, and the rapid growth in the proportion of shopping carried out online, which significantly increased during the pandemic. Also cited was the burden of business rates applicable to shops.
According to the consultation paper, some stakeholders have called for an OST that could be used to rebalance the tax system through funding business rates relief for the retail sector.
That said, the paper recognises that, if an OST was adopted, its design would not be straightforward – as highlighted by approximately 40 questions set out in the consultation response form, including:
- What types of retail sales could/should it apply to (all goods, digital products)?
- What types of businesses should it apply to (e.g. takeaways, click and collect, charities, auctioneers etc)?
- Should it cover B2B and B2C sales?
- How would it work in practice?
The deadline for responding to the consultation was 20th May. We will be carefully monitoring the progress of the consultation, providing further updates as and when there are any further developments.
The High Street and Business Rates
In principle, if funds raised from any OST are ringfenced to subsidise retail businesses, through reductions in business rates, this could have the desired effect of encouraging business to trade through bricks and mortar retails outlets over online shops. This in turn could help to limit the negative impact on the high street, depending, of course, on whether or not any subsidy is focused on the high street rather than out of town shopping malls.
But how would this work in practice? Given that a large majority of retailers occupying bricks and mortar also generate huge online revenues, take big department stores and supermarkets for instance, will they have the OST tax levied on them to supplement their business rates discount? This seems counterintuitive, and potentially complex.
Instead, would any OST be targeted solely at pure online retailers, such as Amazon, albeit they pay business rates on logistic warehouses? If the OST is only targeted at direct online competitors to high street retailers, how are these identified and would the revenue raised through a targeted OST be sufficient to fund the big enough reductions in business rates to encourage retailers to re-open or maintain high street shops?
Ratepayers in other sectors might also have views on this as time goes by. They may argue that, with the increase in remote working, their competitors may be generating revenues in a more cost effective way than their bricks and mortar model, leading to questions over whether similar measures should be applied to their industry.
Another Tax?
At a time when we have a whole range of business taxes that are applicable to the retail industry and that have to be administered and managed by them, including: corporation tax, VAT, employment taxes and national insurance, climate change levy and business rates, which taxpayers will soon have to self-declare/manage, and the new digital services tax and plastic packaging tax, do business really need another tax?
The ones we have already can be complex to manage and administer, adding sometimes significant costs to businesses, especially with the increasing technology requirements to deal increased reporting requirements such as Making Tax Digital. With the impending changes to corporation taxes as well, could the cost associated with administering yet another tax outweigh any potential benefit?
The costs of an OST may not sit with the pure bricks and mortar retail businesses but, depending how an OST works they could end up being passed through supply chains by way of increased costs.
With this in mind, rather than the introduction of a new, possibly complex, OST, could there be better alternatives for supporting bricks and mortar retail businesses to balance out the rate costs, such as targeted changes to VAT rates and/or, employment taxes for bricks and mortar based businesses compared to online? This could leave business rates revenues, which are fed back into local communities, untouched while keeping any tax cost/revenue implications with central Government.
Watch and wait
This is very much at an exploratory stage, as clearly indicated in and by the content of the consultation document. It will be interesting to see the responses received and how far HM Treasury moves this forward at the next stage. In the meantime, watch this space.
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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.
