The pandemic accelerated a number of existing trends, including a rapid growth in the proportion of shopping carried out online. The problems with the decline of the high street for physical retailers, it has been suggested, have been further exacerbated by the UK tax system through business rates (a tax that applies to physical business premises). As part of the UK Government's commitment to support high streets and town centres, it has looked at reassessing the taxation of the online retail sector.
One proposal is the introduction of an Online Sales Tax ("OST").
OST is currently in its consultation period, due to close on 20 May 2022 at 10.00am and the consultation paper invites business's views to help shape the outcome.
An OST would seek to "rebalance the tax system" through using the resulting revenue to reduce the business rates tax burden on physical retailers. Whilst revenue estimates are difficult as the scope is uncertain, the consultation paper puts forward that an OST could raise approximately £1 billion per annum. Therefore, an OST may not even achieve its aims as its revenue falls short of the £7.5 billion levied on retailers in business rates. There are added challenges as the cost of OST would likely be passed on to consumers and commercial rents would likely be raised in response to lowered business rates. Further, given that many retailers have both physical stores as well as an option to shop online, there are risks that retailers may face hefty tax bills with both business rates and OST.
This novel tax on the digital economy would present challenges for the UK Government due to the complexity of creating its scope and structure; even the basic point of defining an online sale presents difficulty.
This complexity is highlighted in the consultation paper that sets out 40 key questions exploring how an OST would work. These questions include but are not limited to:
- whether the OST would apply to goods and/or services;
- whether exemptions would be appropriate;
- who would pay an OST;
- whether a threshold would be appropriate;
- would an OST be calculated by a percentage or on a flat fee basis; and
- how and when an OST would be reported to HMRC and the administrational burden it would place on those affected.
At present, the consultation provides more questions than answers as the Government has not yet decided to implement an OST. The consultation acknowledges the complex nature of online sales and the potential scope of the OST, identifying challenges such as whether this applies to in-store purchases made via online apps, the uncertainty around the definition of "remote" and whether "click and collect" purchases would be covered.
In principle an OST is a good idea but the challenges of introducing in practice are likely to prove a step too far for the Government. Whilst business rates undoubtedly create a lack of a level playing field between physical and online retailers, they do raise a large amount of revenue that would be difficult to find elsewhere.
Therefore, it is important for business, whether physical, hybrid or with a purely online presence, to understand the potential implications an OST may have on their operations. Those likely to be affected are encouraged to respond to the consultation and make their views heard before 20 May 2022.
It will be interesting to see the resulting views and comments made on this consultation in due course.