A UK online sales tax: consultation

HM Treasury has published an open consultation exploring the possibility for an online sales tax (OST) as a means to rebalance the taxation of the retail sector between online and in-store retail by funding business rates relief. The consultation does not put forward any particular proposals at this stage. Instead, it highlights the very many questions over the design and impact of any potential OST, such as the different forms an OST could take and how to define an online sale reflecting the range of transaction, delivery and collection options involved. The consultation explores these issues and the potential impacts of an OST to help the government assess the case for and against implementing such a tax.

Overall, the consultation emphasises the very many challenges involved in designing a new tax, such as an OST. It highlights many of the problems that would need to be solved in order to make such a tax effective, without creating a disproportionate burden on businesses, distortions in the market or opportunities for avoidance.

In addition, the consultation recognises that the online retail sector is thriving in the UK and brings considerable benefits to consumers and the wider economy. The government is therefore keen to stress that it does not see this proposal as one intended to deter people from shopping online.

Background

In 2021, the government carried out a review of the business rates system which concluded with a report published as part of the 2021 Autumn Budget. The result of that review was that business rates were to be reformed but not scrapped. However, respondents to the review also suggested that the government should consider the case for the introduction of a new tax on online sales in order to rebalance the positions of online operators and bricks and mortar business operating from high streets by funding business rates relief for the retail sector. OST proponents argue that the burden of business rates falls more heavily on high-street retail than online retail which may operate through warehouses and distribution centres rather than high street locations. This early stage consultation exploring the possibility of an OST is the government’s response to those calls.

The consultation notes that the growth of online retail sales is down to a wide range of factors and that if implemented, an OST would not be intended to reverse these trends; instead, it would simply be about reflecting businesses’ concerns about a tax imbalance.

The consultation also seeks to assess the overall impact of a possible OST, including possible environmental impacts. It notes that, internationally, there have been proposals for a delivery tax (a flat fee tax on the delivery of goods to home addresses) including in New York and Paris, citing potential environmental benefits. On the other hand, if an OST encouraged shoppers to favour in-store shopping (with associated travel requirements) over home delivery, the environmental impact could be the reverse. However, the document notes that the evidence that a delivery-based or a flat fee OST would have environmental benefits remains unclear.

What would qualify as an online sale?

The fundamental starting point for an OST would be defining the transactions to which it applies. On this point, the consultation notes that determining the scope of an OST would be challenging. For example, would an OST apply to transactions conducted over the internet in any form (including, for example, in-store purchases made via an app) or transactions carried out via any remote technology (including, e.g. telephone and mail order).

If an OST were only applied to internet sales, defining this may prove difficult. For example, the approach of looking at sales concluded
over the internet would cover orders made through an online retailer website or app as expected, but might also capture orders made in-store through apps on customer mobile devices or sales through terminals in-store. Orders made by phone would not be expected to fall within this definition, but the document notes that automated phonelines through which sales can be made share relevant characteristics with online sales, such as scale and automation. In addition, voice-enabled apps and devices would enable placing orders by simple voice commands over the internet, making a distinction between internet and telephone ordering more difficult to justify.

It may be possible to take into account other factors, such as the extent of in-person interaction during the course of a transaction. However, again the document notes that within a single customer shopping journey culminating in an order, there may be both online and in-store interactions.

One area that proponents of an OST have suggested should be excluded from its scope are click and collect transactions, since the arguments around the cost of premises for online and in-store retail apply differently to purchases which are collected in-store. Such purchases rely on access to a conveniently located retail space and may generate footfall in physical shops. Again, however, the consultation notes that this argument does not apply to the same degree to all click and collect transactions. The connection to expensive retail space is less strong, for example, in the case of a locker in a transport hub compared to collection from a high street store. An exemption for all click and collect orders could lead to similar transactions – delivery to a residential address versus collection from a locker on a street corner – being treated differently.

Would it cover goods and services?

Those calling for an OST have generally proposed a tax that would apply to online retail sales of tangible goods - physical objects or products – such as clothes, white goods and food. In these product categories, in-store sales generally rely on valuable retail premises often on or near the high street, with commensurately high business rates.

Equally, the document notes that from an implementation perspective, a tax applicable only to tangible goods could ensure that the administrative challenges are more manageable. However, there would still be challenges, such as determining whether what has been supplied is a good or a service. The consultation offers up the example of a takeaway where the distinction between catering services, takeaways, and other food supplies, such as instant grocery delivery, sometimes operated by the same platforms, would require a careful consideration.

There would also be the question whether all goods should be included within the OST or whether there should be certain exemptions. In principle, a broad-based tax on all goods would appear to be in line with the rationale that an OST should be linked to business rate reductions. Business rates are paid by businesses regardless of the goods being sold including food, medicines, and VAT zero-rated goods.

It would also be necessary to consider the case of digital equivalents of goods, such as eBooks or video games. Should such digital products should be considered equivalent to their offline alternatives for the purposes of an OST?

The consultation also notes that either introducing exemptions or excluding services may lead to value shifting. An example of value-shifting might occur where the revenue received for a tangible good was taxed but the revenue from an associated service, such as delivery, was not. Depending on how the retailer decided to set their prices, the amount of tax due could vary for the same amount received by the retailer and paid by the customer, with a retailer increasing its cost of delivery and decreasing the cost of goods. In this respect, an OST with a flat rate per-transaction would be far less vulnerable than a design which applied the tax to a business’s revenue from online sales. Alternatively, services connected with the purchase (such as delivery) might be included in the scope of the OST.

The consultation notes however that there may be a case for applying an OST to a broader array of services beyond those connected to the purchase of goods. Just as online retail operates in competition with in-store retail, certain online services operate in competition with providers of in-store services. The document raises the case of services which can be delivered online or offline such as media, brokerage services such as estate agencies, gambling, education and healthcare, and professional services. Applying an OST to this group of services may fit intuitively with the objective of the tax, but could generate a great deal of uncertainty and complexity.

Would B2B supplies be included?

Concerns about the burden of business rates have been largely focused on retail premises, such as higher rated high-street premises, where the customer base is usually household consumers. This implies a focus for an OST on online sales to consumers. The rationale for an OST appears to apply less clearly to B2B transactions. While some businesses will make purchases in-store at high street premises, a high proportion of B2B transactions will take place at a wholesale level or along specific B2B supply chains which will not be accessible to household consumers.

In addition, the consultation notes that applying OST to B2B sales risks a cascade effect, with the tax applying multiple times on the same chain of online orders from manufacturer to ultimate consumer. The consultation rules out using a system such as VAT which avoids creating a cascading tax through business supply chains by allowing VAT registered businesses to reclaim the VAT they have paid their suppliers. “Adopting this approach would not be an appropriate option for an OST. VAT is a broad-based tax generally applicable to the provision of goods and services with many more businesses paying and collecting the tax than could be expected for a more targeted OST.”

Another option explored is to limit an OST’s scope to cover only those B2B transactions in which the products sold are consumed by the purchasing business. The consultation notes however that this would bring considerable administrative burdens, requiring the online seller to gather additional information from their customer, such as the rationale for the purchase (including use of the product).

Even if online sales to businesses were excluded, this would still leave online sellers the task of distinguishing between purchasers that are consumers and businesses. The document explores options for how that distinction could be made by the seller, either based on a customer declaration or VAT registration (though noting that many small businesses are not VAT registered). The consultation also notes that it might be possible to use certain simplifications for this purposes, such the type of goods being sold or the typical profile of a particular business (such as wholesalers) or the quantities of goods ordered.

Who would pay the OST?

The assumption made in the consultation is that the online vendor would pay the OST. However, the consultation also raises questions over the role of online marketplaces and other intermediaries.

For example, where a consumer orders goods through a marketplace app providing access to many different stores, a local store may be ultimately responsible for fulfilling the order. The customer has placed the order, the local store has sold the order and the marketplace app has facilitated the order. On the basis that the marketplace app is not making an online sale itself, it is likely to be more appropriate for an OST to look past the intermediary and apply to the local store selling through the online marketplace. However, if an OST did apply to businesses operating through an online marketplace, and not the marketplace itself, there would still be potential for the online marketplace to assist in the collection of an OST (in a similar way to VAT).

How would OST be calculated?

After online sellers have identified which of their sales were in scope of an OST, they would be required to calculate the amount due. This calculation requires first determining the amount to be taxed, and then the rate to be applied to that amount. The consultation seeks feedback on two options under consideration for calculating the amount to be taxed:

• the revenues generated from relevant sales
• a number based on a relevant online sales metric (e.g. number of online orders, number of items sold online, number of deliveries made).

Since the consultation is simply designed to inform the government’s assessment of an OST, no rate or particular flat-rate fee is proposed at this stage. However, the document does contain initial internal estimates that suggest that a revenue-based OST with a £2m allowance, levied at a rate of 1 per cent on online sales of goods from business-to-customer and excluding services, could raise approximately £1bn per annum. Estimates for a flat fee tax with a £2m allowance, levied at a fee of £1 per-order on deliveries of goods, including grocery deliveries for supermarkets and excluding click-and-collect, are of a similar order.

Threshold or allowance?

To ensure an OST would not create additional administrative burdens on small businesses without the capacity to comply with a new tax, and on those overseas sellers with low levels of UK-sales, a threshold or allowance could be included as part of the design. This would set an amount of taxable UK online sales a business generates before it would be required to pay OST. The consultation notes that stakeholders have suggested that a revenue threshold of £1m or £2m of taxable sales could be appropriate.

Additional threshold conditions could be set to further restrict the number of businesses liable to an OST. This could include a threshold based on the number of online orders a business completes in a year. This could be a benefit to businesses that do not frequently make online sales, but when they do, are for particularly high value items. A threshold based on numbers of sales may also be necessary for an OST designed around a flat-rate approach.

The use of an allowance, rather than a threshold, would prevent a hard cliff-edge at the threshold amount. With an allowance, OST would only be due on the amount of sales above the allowance limit.

In order to prevent businesses splitting their activities into smaller units to benefit from multiple thresholds or allowances, the government notes that it would be preferable to apply an OST to businesses under common control, rather than at an individual business level.

International scope?

Since an OST is under consideration as a possible means to rebalance the tax burden between in-store shops and online retail, the rationale for such a tax is limited to sales to UK customers. However, an OST should not advantage sellers based on their location. The tax would need to be chargeable on both overseas and UK-based sellers making sales to UK customers. This, of course, would raise challenges with regard to collection of the OST from overseas sellers into the UK which have no UK presence.

The government’s assumption is that, if implemented, it would be necessary to apply an OST across the whole of the UK. An approach that treated the various parts of the UK differently would be burdensome on businesses, requiring the geographical identification of sales within the UK, which is likely to be a more difficult task than separating UK from non-UK orders.

In addition, the government has said that if an OST were to be introduced, the revenue raised would be used to reduce business rates – which are devolved – for retailers with properties in England. Revenues from an OST would also be used to fund the block grants to the Devolved Administrations who can choose to use them to support public services, individuals, or businesses in Scotland, Wales and Northern Ireland.

Comments

The consultation is open for responses until 20 May 2020 and responses should be sent by email to: OSTconsultation@hmtreasury.gov.uk.

The general tenor of the document suggests that the government is far from convinced that an OST is a desirable option given the levels of complexity that would be involved in its design.

It is important to distinguish the possible OST from the UK’s digital services tax (DST). The DST is a tax on revenues from certain digital services, including social media, search engines, and online marketplaces. It is a temporary solution to the challenges posed by digitalisation to the international system for taxing corporations’ profits. It is due to be replaced by a new global system is put in place to implement the OECD Pillar 1 solution.