Online sales tax: response to the consultation

HM Treasury has published its response to the consultation on the possible introduction of an online sales tax which was launched in February 2022. The government had already announced in the Autumn Statement 2022 its decision not to proceed with an online sales tax and the consultation response document sets out more details on the responses received and the government’s decision.

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 (OST) 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.

In February 2022, the government published an open consultation on the possible introduction of an online sales tax. The consultation noted 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. For more details of the consultation, see our article “A UK online sales tax: consultation”.

Consultation response

It was no surprise that the government announced in the Autumn Statement 2022 its decision not to proceed with an OST. The general tenor of the document suggested that the government was far from convinced that an OST is a desirable option given the levels of complexity that would be involved in its design. And this impression is borne out by the consultation response.

Quite apart from the lack of overall support for the idea of an OST, there were a range of factors that indicated that the introduction of an OST would be challenging. These were all set out in the original consultation and a re-iterated in the response document. They include:

• Difficulties in clearly identifying the transactions that would be subject to OST
• Determining whether it should only apply to goods or to goods and services and, if the former, dealing with boundary issues
• Ensuring the treatment of B2B sales did not lead to a cascade of charges (the response notes that suggestions were made to introduce an OST as a VAT surcharge, but the government did not regard this as an effective solution)
• Concerns over the administrative burden imposed on retailers
• Concerns over the impact an OST might have in constraining growth by smaller retailers
• Concerns over the impact an OST might have on inflation.

Overall, the response document reports that a large majority of respondents opposed the introduction of an OST, including retailers of all sizes and business models. While many supported further reforms to the burden of business rates on retail, most respondents felt that an OST was not the right vehicle to achieve this.

As a result, the government will continue with business rates reforms including revaluations, which is estimated to result in a fall of 20% of total business rates paid by the retail sector and a 27% increase for large distribution warehouses. The government believes that this revaluation of the tax base will go a long way to address the key concern of OST proponents about the imbalance of business rates between in-store and online retail.