The coronavirus pandemic has accelerated the trend away from high street shopping in favour of buying online. This has raised concerns that retailers trading wholly or mainly from physical premises, which are subject to business rates, arguably face an unfair tax burden compared to retailers that trade wholly or mainly online. Those trading wholly or mainly online often have a lower exposure to business rates, because they occupy smaller and/or less expensive premises, solely to warehouse their goods. In response, the Government is considering applying a new tax specifically to retail sales made online, and using the revenue generated to reduce the level of business rates or to fund block grants to the devolved administrations that have different non-domestic rates regimes.
An online sales tax (OST) is a new concept, with little or no precedent in the UK or globally, and there are many commercial and tax specific implications for the sector to consider. At first glance, it seems that high street retailers would be the winners and that those trading wholly or mainly online, who would face both a new tax and the burden of accounting for it in their systems, would be the losers.
The Treasury has now launched a consultation that aims to test the arguments for and against an OST. It assures stakeholders that no firm decision has yet been made on whether to proceed with the new tax.
This initial consultation phase asks for stakeholders’ views on how an OST might be structured, and how any reduction of business rates might be targeted. Key questions put to the retail sector and other stakeholders include:
- how to distinguish between online and in-store sales when imposing the new tax - the Treasury notes several areas where this may be difficult, for example online ‘click and collect’ purchases which are collected in store, or remote sales made offline such as by phone or mail order;
- whether an OST should apply to sales of both goods and services, or to goods only
- If it were to only apply 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) should be subject to the tax.
- Alternatively, were it to apply to both goods and services, this would raise the question of how far it should extend into retail services, for example to online estate agents or gambling websites which may be in competition with high street providers, or even to real world services (such as travel) that can be booked online.
- how an OST should be designed, including whether it should be payable by the vendor or the consumer, and whether the tax should be based on a percentage of the revenues generated from online sales or as a flat fee per transaction.
The rate of the OST has yet to be decided but is likely to be determined by the extent to which the Government wishes to reduce the business rates burden on high street retailers. However, possible models set out in the consultation document suggest that the Treasury has a rate between 1 per cent and 5 per cent in mind. The Government is also considering how best to target any reduction to business rates, eg at the retail, hospitality and leisure sectors and/or at lower value retail properties.
The consultation is open until 20 May 2022 and it is expected that further consultation will follow should the Government decide to go ahead with the proposal.
The breadth and diversity of the retail sector mean that the impact of the proposed changes could be as unique as the individual retailers that will operate under such a new ‘rebalanced’ overall tax regime. What is certain is that it will be a complex task to determine exactly which transactions an OST should apply to, so the Treasury will have to think carefully about whether it is capable of achieving its objectives and is worthwhile, taking into account the revenue that could be raised as well as the new compliance burdens arising.