2018 has seen several high-profile businesses being rescued or left to fail; others are seeking to review their portfolios, funding position or to rationalise their structures; even previously “untouchable” businesses such as John Lewis are feeling the effects of an increasingly tough trading environment.
For many it won’t be missed that those struggling are “bricks and mortar” related. For those businesses who are not restricted by having physical sites they are, for the moment, generally riding out the storm, posting higher growth forecasts and facing a less expensive overall tax bill.
It is therefore unsurprising that the UK Government is looking at potential tax changes that could help level the playing field between traditional ‘bricks and mortar’ and online businesses with a focus on:
• Business property taxes
• VAT treatments for online and physical retailers
The need to try and level the playing field and manage the unknown that is ‘Brexit’ is making this a more complicated challenge for the Chancellor. Indeed, the current uncertainty and lack of clarity around Brexit has led to changes in the timing of the Budget as the Government focusses its energy on the next round of Brexit negotiations. It remains to be seen how these negotiations will impact any further tax policies or announcements by the Chancellor in late Autumn.
Taxing business property
One of the key changes to hit the sector over the past 12 months has been the increase in business rates, despite the fact that these increases had been known by businesses well in advance. This additional cost hit businesses hard and came at the same time as other cost increasing legislation such as the Minimum and National Living Wage. This, alongside the impact of Brexit has led to increased costs and concerns around consumer confidence. Despite lobbying from businesses, trade bodies and some MPs, the Chancellor appears to have taken the decision to rule out reforms to business rates, despite the well documented impact on the health of UK high streets.
Opposition parties such as the Liberal Democrats are expected to recommend scrapping business rates and replacing the regime with a land value tax.These proposals are likely to be of great interest to businesses in the 92 per cent. of local authority areas who would, according to the Liberal Democrats, pay lower business taxes under their proposals.
Could a “land value tax” work?
In a location where there is still potential for further development, theories which underpin a land value tax, seek to encourage landowners to maximise development so that they can maximise their return on the land. However, in crowded town and city centres, with notoriously tough planning restrictions, there is a real risk that the theory will break down.
Instead of new developments (and higher rents for commercial users), it seems equally probable that landowners will try to pass the costs of the new commercial landowner levy on to their commercial tenants through periodic rent reviews which are a feature of most commercial property leases. While the new levy might provide a period of respite for commercial tenants, within 10 years the effect on businesses is likely to be no different to current business rates.
A land value tax could also be used to replace council tax, again with the tax being paid by the owner of the land and not by the occupier of the property. For owner-occupiers, in principle the effect would be the same – they would pay a tax computed by reference to a value attributed to their property – but the tax level would probably be higher. For tenants, the abolition of council tax would be very welcome, but any relief would almost certainly be short-lived as landlords would likely factor this in rental calculations.
Differing VAT treatments – online versus physical
The Chancellor has stated that he wants ‘to ensure that taxation is fair between businesses doing business the traditional way and those doing business online’.
The options currently being debated will not include different VAT rates as part of that deliberation. Indeed, under current law, applying different VAT rates to the same goods would be illegal.
VAT is charged on the ‘value added’ at each stage of a “production and distribution” or “service” process. For example, a supplier to a pub would typically charge VAT on its products. Businesses generally do not suffer the burden of VAT on such supplies, as it can be generally reclaimed, but the business is required to charge VAT on its own supplies to its customers. This ultimately means that VAT is usually a cost borne by the end consumer.
Adopting this approach therefore indicates that if a higher VAT rate applies to online retail sales than to sales by high street retailers then, rather than levelling the playing field between the two, the additional VAT burden would result in increased costs for the consumer.
Furthermore, as click-and-collect has become a popular way for shoppers to efficiently purchase items online, then far from levelling the playing field, different VAT rates would add to businesses’ administrative burden and compliance costs. Different VAT rates would also likely confuse consumers, particularly where the goods ordered online are also available in-store.
So where does that leave consumer businesses?
At this stage, Bricks & Mortar consumer businesses will continue to operate without clarity and, as a result continue, to bear the additional costs. Despite the concerns from various stakeholders in the sector and beyond, of the impact of business rates, there is no simple answer to replace this system. It seems almost inevitable that further complexity would be introduced if there is a reform of business rates, and perhaps council tax too, to try and ensure that tax is borne by the landowner rather than the businesses occupying the land..
As VAT would not appear to be either a legally competent or administratively practicable means of levelling the playing field between the high street and online retailers, the focus will once again fall on taxing the value generated by online businesses…but remembering Brexit still looms large and the Chancellor is likely to want to have a trick or two left up his sleeve!