Should the UK Government introduce an online sales tax?

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By Susan Cattell, Head of Tax Technical Policy

4 April 2022

Susan Cattell outlines the difficult questions posed in a consultation about the possible introduction of an online sales tax in the UK.

Why consider an online sales tax?

The recent Treasury review of business rates produced some reforms to make the system fairer but concluded that the rates system should be retained. Business rates fund local services and there is no alternative with widespread support that would raise sufficient revenue to replace them.

However, some regard the system as unduly skewed against bricks-and-mortar retail. The purpose of an OST would not be to replace business rates but to rebalance the tax system by funding reductions in business rates for the retail sector.

Others view the increase in online retail as reflecting consumer choice and innovation which should not be subject to an increased tax burden. Business rates might not be the major driver in the move to online shopping. Business rate reductions might also increase rent expectations for property, with adverse effects on in-store retailers who do not own the property they use.

Designing a workable OST would not be straightforward. The consultation poses some difficult questions that would need to be addressed. It stresses that no decision has been taken to proceed with an OST; the Government wishes to assess the evidence and test the arguments for and against.

Scope – which transactions should be covered?

More than ten pages of the consultation discuss the range of issues to be addressed in determining the scope of a possible OST. Some key questions that would need to be decided include:

• Should an OST only apply to ‘online’ services, broadly those involving the internet – or should it apply to all remote sales (including potentially, email, telephone, mail-order, apps)? What is an ‘internet sale’ – for example, would it include orders made through in-store terminals or orders made via voice-enabled apps?
• How should click and collect be treated? There are suggestions that these sales should be exempted on the basis that they are collected in-store. However, increasingly they can be collected from a variety of other locations – the consultation identifies seven models. Exemptions could have a significant impact on revenues. Distinguishing between the different models could also lead to behaviour changes to avoid the tax.
• Goods and services: should the tax only apply to tangible goods? This might be more manageable administratively but raises some questions. For example, should there be exemptions for some goods? How would the distinction work for takeaways, catering services and other food supplies? If goods and services are sold together and only goods are taxable, how could the risk of value-shifting and avoidance be addressed? How should digital equivalents of physical goods be treated?
• Business to business sales: the consultation suggests, for several reasons, that these should be excluded, and that an OST should focus on sales to consumers. However, businesses would then have to determine which of their sales were being made to consumers – this is unlikely to be simple.

Design – who would pay and how should it be calculated?

In theory it would be possible for an OST to be applied to the vendor, the marketplace/platform (where this is a different entity), the delivery company or the consumer. However, most of those suggesting an OST have assumed it would be paid by the vendor, rather than the consumer. If this approach were to be adopted, it still leaves a number of questions to be answered:

• How should sales via online marketplaces or intermediaries be treated? Who should administer and collect the OST? Several possibilities are identified in the consultation.
• How would cross-border sales be treated?
• How would the amount to be taxed be calculated and what should the rate be? In considering these questions, the consultation notes that it is important to consider the impact on consumers (if OST costs are passed on) and the administrative burdens for the online retailer and HMRC. Two main options are discussed:
  1. Revenues generated from relevant sales.
  2. A number based on a relevant online sales metric (for example, number of online orders, number of items sold online, number of deliveries made).
• Should there be a threshold to ensure that an OST would not create additional administrative burdens for small businesses and overseas sellers with low levels of UK sales? This would set an amount of taxable UK online sales a business could generate before it would need to pay an OST. The consultation invites views on an appropriate threshold level.
• If a threshold is included, should all sales be taxable once it is crossed – or should there be an allowance, with only sales above that level being taxable? The consultation suggests that any threshold or allowance would apply to individual businesses or groups, i.e. there would be no aggregation of sales for marketplaces or franchise operations.
• Should reporting and payment be annual or quarterly?

Impacts

The final part of the consultation considers the likely impact of an OST on the business landscape and consumers. The intention behind an OST would not be to actively encourage customers to shop in-store rather than online – but to raise revenue to fund business rate reductions. However, given the multiple design options, and changes in online shopping habits driven by the pandemic, it is difficult to estimate revenues and to assess the case for and against an OST. The consultation sets out some suggestions, and asks for input on questions about the possible impact of an OST including:

• Would the potential revenues justify the additional administration and design complexities?
• To what extent might an OST affect innovation, efficiency and productivity?
• What might be the impact be on consumers’ behaviour and use of in-store retail?
• How far will the cost of an OST be passed on to consumers? Will some groups of consumers, for example, those with reduced mobility, be disproportionately affected?
• What environmental impact could an OST have?

Devolution and the OST

Business rates are devolved, so any reductions in business rates funded by an OST would only apply in England. However, an OST applied only to sales in England could be burdensome for businesses, requiring them to identify orders by jurisdiction. Further complexity would arise if the devolved administrations introduced similar taxes. The Government therefore suggests that any OST would be a UK-wide tax. It would be used to fund business rate relief in England and to fund the block grants of the devolved administrations in the usual way.

Let us know your views

We would welcome Members’ views on this consultation, or on other tax-related matters – email tax@icas.com to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by Members.