Tuesday, March 5, 2024
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Taxing the world of online

For years there have been calls from the world of physical retail for some form of levelling up with online, ideally in the form of either business rates revaluation or an online sales tax. And it appears that the latter is uppermost in the government’s mind right now because, at the end of February, it launched a consultation on a UK-based online sales tax (OST) which ran until 20 May 2022.

As for business rates reform, the government reviewed the system last year and published a report in the 2021 Autumn Budget. The overall direction of the review was that business rates should be reformed, but not scrapped. And to do this, many who responded to the review felt that the government should look at a new tax on online sales to level the playing field between online operators and bricks and mortar business operating from high streets – with the monies raised used to fund business rates relief for the retail sector. From their point of view, the burden of business rates falls more on high-street retail than online precisely because the latter operate from warehouses and distribution centres rather than expensive high street locations.

This new consultation is the government’s response to these calls.

The plans detailed within it are not very advanced and no particular proposals were detailed. Instead, it contemplates what an OST could look like, its likely impact, what it’ll capture, and the burden it might place on businesses.

The government has made clear that the idea behind any OST is not to damage the world of online. Nevertheless, if an OST was enacted, the government would not seek to reverse what has happened, merely redress the tax imbalance.

And there is much to consider. There are possible environmental impacts, so should an OST follow proposals that have been suggested elsewhere – including New York and Paris – for a flat fee tax on the delivery of goods to home addresses? Or should it seek to encourage shoppers to buy in-store but with consequences for road use?

Another issue to resolve is what would qualify as an online sale and which transactions or part of a transaction will count? Then there’s the matter of comparing internet sales from pure online operators and internet sales from high street retailers. Beyond that are purchases made by consumers via apps for click and collect. And what of orders that are made more traditionally over the phone or via mail order? And whether an OST covers just goods sold online, or goods and services. There’s also the matter of how to handle digital products versus the physical version of the same, how to handle sales made by organisations outside of the UK, and how firms with multiple business units would be dealt with.

But online is more than sales to consumers. It also encapsulates sales to businesses – how would that be handled? Then there’s the risk that, like VAT, an OST on B2B sales could multiply costs down the chain to the end consumer. And if B2B sales are excluded, there’s the question of how sellers distinguish between business and consumer buyers.

Another issue the consultation talks about is the calculation of an OST: Once a sale was within the scope of the tax, the appropriate tax would need to be calculated. The consultation discusses two options – a value based on relevant online sales or a measure such as the volume of online orders, number of items sold online, or deliveries made.

Naturally, SMEs and microbusinesses will be concerned about the disproportionate burden placed upon them, and so the consultation talks of either a threshold or allowance could be included as part of the OST. Some have suggested that a revenue threshold of £1m or £2m of taxable sales could be appropriate.

There’s no telling how the consultation will play out, but if enacted, it should lead to some of the heat being removed from business rates bills. That said, the consultation almost suggests that the government is not convinced that an OST would work precisely because the topic is very complex. Time will tell.

To read more, see: www.gov.uk/government/consultations/online-sales-tax-policy-consultation.


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