Philip Munn

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Philip Munn

Partner

Could tax reform save the high street?

It has been hard to miss the strains that UK high street retailers have been facing. Many have called for a change in the way the retail sector is taxed, to reflect the way today’s consumers shop. The latest, and perhaps most high-profile voice calling for reform, is Tesco’s chief executive Dave Lewis who described the current system as ‘outdated’.

A Targeted Levy

Tesco has seen its headline rates bill double in just 10 years and 'whether you are a large retailer… or run an independent corner shop… this is unsustainable' says Lewis. He has suggested that a 20 per cent reduction to high street retailers’ rates bills should be made and the gap filled with a 2 per cent levy on online sales. 

The proposal highlights the challenge faced by most bricks and mortar retailers paying rates for high street or convenient (and costly) locations, versus online operators whose business models permit them to locate large warehouses in less attractive locations that attract far lower rates bills.

Mr Lewis is not the first to call for such measures. The UK government has heard similar calls previously from other retail giants but has stated openly that an online goods sales levy would be counterproductive, as retailers would simply pass the cost onto consumers.  

It was further reported in January 2019, that any levy to help struggling high street retailers was ruled out once more, as the UK government claimed that this approach would fall foul of EU state aid rules. 

The UK’s departure from the EU should in theory remove this obstacle. However, the proposed EU Withdrawal Act will transpose EU state aid rules into domestic legislation. Therefore, unless the government amends the terms of the Withdrawal Act (or, after the UK leaves the EU, the UK takes unilateral action on state aid) this proposal cannot take place.

Digital Services Tax

However, the government has confirmed plans to introduce a new digital services tax in April 2020, targeting the revenues of the global established technology giants such as the search engine Google. The 2 per cent tax will apply to revenues generated from companies who are considered to derive significant revenue from the participation of UK users. The tax will only apply to businesses with a global revenue exceeding £500m and who generate more than £25m in revenues from in-scope business activities. The tax is however expected to generate more than £400m a year in extra tax.  

The Worst of Both Worlds

There are, of course, a variety of policy options available to the government to replace the exchequer receipts that would arise from a reduction in rates. An increase in the VAT rate is probably the most obvious, but perhaps the most politically sensitive option. However, once the digital services tax is operational, and assuming that Brexit takes place, it doesn’t take a giant leap of faith to see an expansion of the digital sales tax, which could morph over time into a quasi-online sales tax. This may however put retailers with both a high street presence and online presence in a worse position, if a rates reduction isn’t actioned.

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