HM Treasury’s consultation on proposals for an Online Sales Tax to “help rebalance taxation of the retail sector” is due to close next week.

It is seeking comments both for and against implementing such a tax in order to help fund business rates relief for the retail sector at a time when footfall remains below its pre-pandemic level.

The government acknowledged that its design “would not be straightforward” in terms of distinguishing online and offline activity “reflecting the range of transaction, delivery, and collection options”, as well as the forms of tax that can be adopted.

However, given the significant changes in the retail market and shift online, “it is right that the government reassesses the taxation of this sector” and “assessed the effects on consumers and businesses whether to proceed with an OST”.

Indeed, the pandemic supercharged online sales with their proportion of all retail sales soaring from 3% in 2006 to 22% in March 2020, with many bricks and mortar retailers saying they bear the burden of business rates relative to online competitors.

As such, for some, the OST would “level the playing field” between online retailers and the bricks and mortar retailers.

In a debate on ‘Should the government introduce an online sales tax?’ organised by the Chartered Institute of Taxation (CIOT) and the Institute for Fiscal Studies (IFS), senior economist at IFS, Stuart Adam, said he’s not convinced it would “level the playing field” or help the offline industry. In fact, he said it could push up prices for online goods and services, cut wages and lead to higher property rent.

Adam said: “It is widely asserted that OST would simply be passed through to consumers with higher prices. I don’t think it’s necessarily as simple as that. But yes, you would see the prices charged by online retailers going up and to some extent offline competitors would also increase their prices because of less competitive pressure from online retailers.

“We might also see reduced wages from online retailers and again also their competitors or simply fewer jobs. I would expect to see rent fall for properties that online retailers use, warehouses and so on… and rise for high street retail premises as the demand for retail property went up.

“It is also true to say that profits would be squeezed for online retailers, and to a lesser extent, rise for offline retailers not subject to tax.”

He added that the OST would need to be “fairly chunky” to pay for a reduction in business rates as initial government estimates suggest that for each 1% tax increase on companies turning over £2m+ would raise £1bn in revenue.

Tax on SMEs and the consumer

For Alasdair McGowan of eBay UK, which is against the OST proposal, the driving force behind the growth in online retail isn’t down to eBay or Amazon, but it’s the consumer driving this.

“Consumers value the convenience, the choice and yes, the price competition that online brings. That doesn’t mean we get rid of offline retail. Consumers want both. They want to be able to see items, feel items, try them on then buy them. Yes, the high street is changing but we have to move on from the false choice of online vs offline. We now live in a multi-channel world and it’s here to stay.

“So, if we want to build back better, and deliver the sustainable growth that we all want for retail, we need to deliver the business rate reform but we also need to regard online as an opportunity and not a threat.”

He explained that 300k SMEs use the platform and while many aren’t visible as they’re not seen on the high street, “they are real, they are local and they contribute to the local tax base. They are entrepreneurs worthy of our support”.

McGowan added: “It’s not a tax on tech, but a tax on SMEs and the consumer at a time when SMEs are struggling to get back on their feet post-pandemic and at a time when households are struggling with a huge increase in the cost of living.

“When talking about the fairness of this tax, it would be regressive – that is acknowledged by the treasury. Like all sales taxes, it would be regressive so it would hit the poorest hardest.

“We hear a lot about the impact on businesses in this debate, but we should never lose sight on the impact on consumers when households are really, really struggling…and will they want to pay an extra one or two or 5% on their online shopping bill? I would question whether they would support that.”

He said he believed this would be a tax on the future and on further retail growth, with some high street retailers being worse off as a result.

‘All retailers should pay their way’

For Nick Lakin of Kingfisher PLC which owns B&Q and Screwfix, the current business rate system doesn’t work – it was last reformed 30 years ago before online shopping. However, cutting business rates and covering it with an OST is a good idea.

He explained that all retailers are planning to see an increase in online shopping and responsible retailers want to help cover the cost of Covid.

He said their argument in favour of an OST is not just down to “commercial interest”, but “it’s what’s right for society and the revenues these taxes bring”.

Lakin used the example of Amazon which paid £70m business rates on £20bn of sales. By comparison, B&Q and Screwfix had a turnover of £6bn and paid £140m in rates. Meanwhile high street stalwart M&S had a £10bn turnover and paid £184m in rates.

“Business rates are disproportionately taxing retailers with physical stores, it’s the biggest barrier to growth and the biggest cause of store closures.

“Rates are an analogue tax and are no longer fair. The system is inefficient, and its certainty is in increasing doubt with the growth of online retail.

“On the other hand, an OST can be efficient, simple and ensures both future government revenues and the best for consumers in society. This change can have significant benefits when all retailers – regardless of channels – can compete fairly.

“It will mean more competition for customers. That means more choice, and the best deals for consumers and that will allow the best retail businesses to survive and thrive. With more jobs and investment in our communities, that means better high streets, better retail parks, indeed better shops everywhere and that’s why we support it.”

Questions of scope

While Lakin believes an OST would be “simple and straightforward”, Gabby Donald, KPMG LLP and chair, and who sits on the CIOT indirect taxes committee, said many questions are raised about the introduction of an OST.

These include the scope and design of the tax, around its implementation, its effectiveness and what it hopes to achieve.

“Do we look at a narrow scope eg goods or on B2C goods? Geographical scope so UK business and UK consumers? It risks the argument that its unfair or distortive.

“Will it look to apply tax globally so to any sale into the UK market or by any sale by a UK retailer out of the UK market? That brings its own challenges – how to register and collect such a broad tax.”

Donald also questioned if services would come under its scope, so would OST also apply to banks and betting shops, for instance.

The consultation runs until 20 May 2022.