UK Treasury launches 3-month review on 1% to 2% Online Sales Tax on e-commerce goods and services
A consultation into taxing e-commerce to subsidise high-street retailers’ Business Rates charges has been launched until 20 May 2022. Three models are being reviewed:
- % turnover tax on e-commerce
- Flat-rate levy per transaction
- Delivery Tax surcharge
The Treasury estimates a 1% Online Sales Tax (OST) could raise £2 billion if a threshold on sellers of £2 million annual turnover was included. Although the scope of the goods and services would have to be clarified. The revenues raised would be used to reduce Business Rates, a charge based on rental value, which raises £25 billion per annum for local government. The OST proposal is separate from the existing UK Digital Services Tax, on large overseas providers of digital services, which should be withdrawn as a result of the recent OECD Inclusive Framework tax (Pillar 1) settlement.
However, challenging issues will need to be tackled:
- complexity vs revenues raised;
- non-resident evasion;
- risk of tax being passed to consumers; and
- how to tax click-and-collect from shop and other complex business models.
The consultation opened 25 February and closes 20 May 2022.
Online Sales Tax (OST) questions
Whilst appealing as a popularist measure to prop—up the high-street, such an online sales tax would be problematic:
- Experience of the Digital Services Tax has shown that such levies generally are immediately passed on to shoppers, and not the online retailer as intended. It is therefore effectively VAT, and is doubling-up on tax complexity
- The scope of the tax, should all services be included with goods, needs to be determined.
- There are problems on compliance complexity and simple avoidance risks, particularly for non-resident online retailers. It is not clear how it would be levied with retailers that are both online and in the high-street. How would ‘click and collect‘ work for such a tax?
- Would the OST apply only to sales to UK consumers? If foreign sales were excluded, what basis will this be tracked on?
- How would returns, and tax credits be managed?
- Since Business Rates are a devolved tax, any OST would be an England-only measure. This would present challenges with identifying the residency of the UK consumer;
- As with VAT, the role of intermediaries and potentially defining them as the deemed supplier would have to be evaluated. The role of the underlying supplier, intermediary and buyer would have to clearly defined to avoid confusion and avoidance opportunities.
- What are remote sales? Websites and marketplaces may appear obvious, but what of phone, mail, apps’ and instant messenger services. This becomes complex as stores increasingly encourage shoppers to buy online or app whilst in-store – how would this be separated for OST)
- The high street may instead by supported from other, more targeted measures, such as the upcoming Business Rates tax review
- The revenues from such a tax would likely be small, and of questionable cost-benefit value given the complexity of application for HMRC and taxpayers
- On the windfall levy, effectively backdating a corporation tax rise to the start of 2020, this creates uncertainty for future investment confidence
There could also be a delivery tax to reduce / charge for traffic and pollution. This may be chargeable by the seller or delivery agent.
This is in addition to the UK’s Department for Transport position statement for a mandatory delivery charge on ecommerce sales. This has similar aims to plastic bag taxes: nudge consumer behaviour towards more environmentally friendly behaviours such as reducing buy and returns, or encouraging more efficient bundling of multiple purchases.
November 2021 plans announced
The UK Chancellor, Rishi Sunak, in November 2021 confirmed that the government would publish this OST consultation. Also muted is an online COVID-19 windfall tax to capture the major boost online retailers enjoyed during the various lockdowns as the traditional retail market was shut out.
The UK Treasury is looking how to tap into the boom on ecommerce trade since the start of the COVID-19 crisis. Non-food online retail has expanded from 31% to 46% of all UK online ecommerce in 2020.