21st April 2022
The Government has issued a consultation inviting the views of business on the pros and cons of introducing a new tax on online sales. The consultation was promised in the 2021 review of business rates.
The consultation responds to the concerns of bricks-and-mortar retailers that the effect of the business rates regime is that they bear a disproportionate tax burden compared to online retailers, and that this will not be fully addressed by the proposed business rates revaluation in 2023. The 2021 review concluded that the business rates system should be retained as there is no generally supported alternative which would deliver the same revenue as the business rates system.
The focus of the consultation is on the interaction of an online sales tax with business rates and is not a wider review of how the digital economy should be taxed.
The consultation asks for feedback on a number of issues identified by the Government if an online sales tax were to be introduced. It is clear that this is a listening exercise by the Government at this stage and no possible options or timescales have been tabled. The consultation closes on 20 May 2022.
Although no model is put forward in the consultation, it is clear that it would be a form of levy on transactions carried out “online”. The Government acknowledges this raises many questions, including what would an “online” transaction cover, will it apply to just goods or extend to services, would it be focussed on sales to consumers and how would it be collected.
Online transactions would include sales taking place over the internet and views are sought on whether it should include transactions arranged by phone and/or through apps (including in-store apps). Views are invited specifically on whether click and collect transactions should be outside the scope of a possible online sales tax on the basis that this may encourage footfall within stores operating click and collect.
A key question is whether the tax should apply only to purchases of goods, or whether it should cover services and/or supplies involving both. The consultation acknowledges the difficulty in drawing a boundary between goods and services in areas such as meal delivery and where customer support is included when a product is bought. If services are to be included, there are issues around whether this should be limited to services which are delivered online (such as cloud computing services) or whether it should include services which are physically delivered (such as leisure and hospitality) but ordered online. Views are also invited on how digital forms of goods (such as e-books) should be treated.
The consultation points out there would be many issues if an online sales tax were to apply to business-to-business as well as consumer sales. In particular, there would be a possibility of the levy being paid at a number of levels in a business supply chain before sale to the final consumer.
The tax would need to be collected from sellers. Many sellers operating online are small scale so the consultation asks for views on whether there should be a minimum turnover threshold and how the tax might be collected through online marketplaces and similar intermediaries. A particular issue is how the tax could be collected from sellers with no UK presence.
The consultation notes that an online sales tax levied at the rate of 1% or 2% would not raise enough revenue to replace the estimated £7.5 billion paid by retailers in business rates so a higher rate would be required for a revenue neutral online sales tax which would raise the political obstacles to introduction. The Government is also keen to retain and develop innovation in the retail sector and maintain competitive pricing for consumers.
In reviewing the responses, the Government will need to balance the benefits of retaining High Street occupancy against other factors such as the impact of such a tax on the cost of living, the impact on innovation and competitiveness and the risk of overall tax and rates revenue being reduced.
Businesses that might be affected by an online sales tax should consider responding to the consultation.
If you have queries about any of the points raised in this briefing, require advice or assistance with responding to the consultation, or have any other concerns, please contact one of our experts below.
Head of Technology & Digital