Treasury unveils plans for an online sales tax

22 April 2022

The Treasury has launched its anticipated consultation on proposals to introduce a new online sales tax (OST). This consultation, first promised by the Chancellor in the 2021 Autumn Budget, aims to test the arguments for and against an OST. The Treasury assures stakeholders that no firm decision has yet been made as to whether to proceed with the new tax but says that recent changes in the retail market mean that the time is right to reassess the taxation of this sector.

Why is an online sales tax being considered?

The coronavirus pandemic not only greatly reduced shopping footfall on the high street, but it has also accelerated the pre-2020 trend away from high street shopping in favour of buying online. This has exacerbated concerns that retailers trading wholly or mainly from physical retail premises, which must pay business rates for those premises, may face an unfair tax burden compared with retailers trading wholly or mainly online as these traders often occupy smaller and/or less expensive premises to warehouse their goods (and therefore have a lower exposure to business rates).

The Government has decided that it will keep business rates, but is now considering options for an OST, whose revenues could help rebalance taxation of the retail sector between online and high street vendors by allowing for a reduction in business rates (or additional block grant funding to the devolved administrations in Northern Ireland, Scotland and Wales that have different non-domestic rates regimes).

What would the online sales tax apply to?

The OST is designed to capture retail sales made online, but the Treasury notes several areas in which it may be difficult to distinguish between online sales, which would be subject to the OST, and in-store sales which would not, including for example:

  • in-store purchases made via an app or online reservations collected in-store;
  • ‘click and collect’ online purchases collected in-store;
  • remote sales made offline, such as by phone or mail order; and
  • purchases made through automated phone lines and voice enabled apps.

The consultation document also considers whether an OST should apply to sales of goods only or to both goods and services. If it were to apply only to goods, the Treasury highlights potential areas of difficulty in distinguishing between goods and services, for example whether online orders of takeaway food (treated as a catering service rather than a supply of goods for VAT purposes) should be subject to the OST. There could also be a risk of avoidance via value shifting between online sales of goods and closely related supplies of services to the extent that services are not in-scope.

On the other hand, were the OST to apply to both goods and services, this would raise the question of how far it should extend, for example to online estate agents or gambling websites that may be in competition with high street providers, or even to services usually purchased at other physical premises (such as bus and rail travel) that can also be booked online.

The Treasury asks stakeholders for views on whether and which of these scenarios should be taxed and the possible practical implications.

How would the tax work in practice?

The Treasury asks for views on how an OST might be designed. Key areas for consideration include the following.

  • Should the OST be payable by the vendor, or the consumer?
  • For sales through online marketplaces, should it be the operator of the marketplace that is liable to the OST rather than the vendor (the current approach for accounting for VAT on such sales)?
  • How would cross-border sales to UK customers be treated?
  • Should the tax be based on the revenues generated from online sales or as a flat fee?
  • Would a threshold be appropriate so that smaller businesses, and/or those with limited online sales, do not have to deal with the OST?
  • How often would returns and payments be due? The Treasury prefers quarterly reporting but asks for thoughts on whether reporting periods based on the tax year or another annual period might be more suitable.
  • What data and systems changes might be required to implement an OST, and how much of an administrative burden would it create for the sector?

Rates and revenues

The Treasury estimates that the total annual business rates revenue from retail properties in England is around £7.5bn. The rate of a new OST would depend on the precise design of the tax and would likely be determined by the extent to which the Government wishes to reduce the retail sector’s business rates burden, something that appears not to have been decided yet.

The Government is also considering how any reduction to business rates might be best targeted; eg at the retail, hospitality and leisure sectors and/or at lower value properties. It has asked for views on whether imposition of an OST and a lowering of business rates could have any consequent effect on rents that could lead to the benefits of lower business rates ultimately flowing to property owners rather than retailers.

What happens next?

The consultation is open until 20 May 2022 and the Treasury invites comments from a variety of stakeholders, such as high street and online retailers, their advisers and representative groups. It is expected that further consultation would follow should the Government decide to go ahead with an OST.

An OST is a new concept with little or no precedent in the UK or globally, and the Treasury has asked respondents to think hard about the various commercial and tax specific implications for the sector.

For more information, please get in touch with Simon Atkins or your usual RSM contact.