Online Sales Tax: the right way forward?
What is happening?
On 25 February 2022, HM Treasury launched a consultation exploring the possible introduction of an online sales tax (OST) to address the imbalance resulting from the higher business rates applying to in store retailers, compared to online businesses. The consultation closed on 20 May 2022.
Why does it matter?
The global coronavirus pandemic served to accelerate the popularity of online retail and reduce footfall in the high street as customers were subject to lockdown. The obvious disparity between rates for bricks and mortar and online retailers came into sharp focus. The intention behind the novel OST is to raise revenue from online retail in the UK and fund a reduction in business rates for retail properties.
However, the proposal is not without its complications. The first being, what exactly constitutes an online sale? Transactions made and paid for through a website clearly fall within the ambit of what can be termed an online sale. However, a grey area exists for orders made via social media or through mail-order. The consultation focuses specifically on whether 'click and collect' should be exempt from OST. Proponents of OST argue these sales should be exempted on the basis that where the collection point is a physical shop, they continue to generate footfall in physical shops. However, not all 'click and collect' locations are physical stores and so the position is more nuanced.
Another problematic issue is which transactions should be subject to OST. Should OST apply to just goods or both goods and services? It seems obvious that OST should apply to goods. However, where goods are bundled together with services (for example, takeaway orders), how should those transactions be treated? The answer may lie in splitting the goods from the services (ie the food from the delivery) though practically this may prove complicated. The same question remains on how digital equivalents of physical goods should be treated and whether those goods should be exempt from OST.
The next difficulty is who collects and accounts for OST? The consultation proposes that OST will be levied and collected by online vendors. However, what is unclear is whether online marketplaces are in scope and how cross border transactions are to be treated.
How OST is calculated is also considered in the consultation. Two options are suggested. The first is a revenue model, potentially 1–2% of revenue generated by online sales. The second is a flat-fee model based on the number of online sales made.
There have been calls in the industry for a rethink on how to implement OST, including from the Chartered Institute of Taxation, which has noted that introducing an OST to fund new business rates reliefs may lead to higher commercial rents, meaning that only landlords benefit, rather than retailers.
What action should you consider?
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Statistics
For every £100 earned by large retailers, £2.91 is owed to local councils in business rates, compared to just 34p by online-only retailers. (see here)
According to The British Retail Consortium’s Retail, Rates and Recovery: How business rates reform can maximise retail’s role in levelling up report, published last September, 83% of retailers said it is ‘likely’, ‘very likely’ or ‘certain’ that they will close shops if business rates are not reduced.