The coronavirus pandemic has accelerated the online spending trend. This has raised concerns that retailers trading from physical premises, which are subject to business rates, face an unfair tax burden compared to online retailers.
Those trading online often have a lower exposure to business rates, because they occupy smaller and/or less expensive premises to warehouse their goods. In response, the Government is considering taxing 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.
This 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 online vendors, who would face both a new tax and the burden of accounting for it in their systems, would be the losers.
However, as is usually the case, the reality is not that simple. What will happen if a retailer has diversified and now has both an in store and online offering, is it at risk of being taxed twice?
The final design of the tax will determine which businesses this has greatest impact on, there are a number of factors to consider. For example, how will HMRC distinguish between online and offline sales when imposing the new tax. The Treasury notes several areas where this may be difficult, such as online ‘click and collect’ purchases, which are collected in store, or remote sales made offline, such as by phone or mail order.
Whether the tax will apply to sales of good and services, or only to goods. If it only applies to goods, the Treasury highlights potential areas of difficulty in distinguishing between goods and services, for example whether online orders of takeaway food, which are treated as a catering service rather than a supply of goods, should be subject to the tax.
Alternatively, were the tax to apply to both goods and services, this would raise the question of how far it should extend into retail services. Would online estate agents or gambling websites which may be in competition with high street providers, or even other services traditionally purchased in-store but which can now also be booked online, such as travel, fall within the scope of the new tax.
And ultimately, whether it should be payable by the retailer 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.
The other area of concern is how will HMRC police this new tax. With resource already under pressure, will HMRC have the capacity to monitor and enforce sanctions if online retailers are non-compliant.
The consultation is ongoing so what rate the online sales tax will be set at 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 and 5% in mind. The government is also considering how best to target any reduction to business rates, for example at the retail, hospitality and leisure sectors and/or at lower value retail properties.
What is clear is that urgent business rates reform is needed to ensure retailers are paying a fair amount before any new online sales tax is rolled out, as using the current system as the benchmark is not a fair reflection of today’s property prices.
Ultimately, the sheer breadth and diversity of the retail sector means that the impact could be as unique as the individual retailers that will operate under this new rebalanced tax regime. What’s certain is it will be a complex task to determine exactly which transactions the tax will apply to, so the Treasury will have to think carefully about whether an online sales tax is worthwhile considering the revenue that could be raised. /Ends.