Online sales tax – deciding how one could work

After some delay, the government has finally published an ‘early stage’ call for evidence on how the concept of an Online Sales Tax (OST) could work in the UK.

The idea arose from a past consultation on Business Rates reform: broadly, online retailers pay less business rates than those on the high street, so respondents suggested that a new tax on online sales could help level the financial playing field – by raising revenue that could be used to subsidise Business Rate costs for some ‘bricks and mortar’ retailers. The current document makes clear that the government is not yet committed to creating such a tax, but is just investigating the options to see if it could be beneficial.

Objectives of an OST
The call for evidence makes clear that funds raised by any new tax would be ringfenced to subsidise Business Rates for some businesses, rather than as an alternative to Business Rates or as a general revenue-raising measure. It suggests that the tax could raise around £1bn a year, rather than the £25bn currently raised through Business Rates. Clearly, many will ask whether creating a new tax with new administrative burdens for businesses is justified simply to attempt to balance out the costs/profitability between ‘clicks and bricks’ business models.

What should an OST apply to?
The government has yet to decide which types of taxable sales from remote retailers would fall within the tax. The call for evidence asks for views on whether it should only include sales of goods via the web, or whether sales via app, mobile platforms, remote phone or mail order and even ‘click and collect sales’ should be within its scope, and if cross-border transactions should be taxed. If international transactions are to be within the scope of OST, this raises questions about whether any form of double tax relief would be offered (ie by deduction or credit), as is already the case with the UK’s Digital Services Tax.  

Similarly, views are sought on whether sales of services should be covered, or if the OST should just apply to goods. At the next level of detail, the government asks whether there should be any exclusions – for example, for food, drink, medicines, VAT zero-rated goods; e-books; e-newspapers, magazines or music downloads, and whether delivery costs should be included. And in the services arena, whether food take-away services, services associated with sales (eg warranties, delivery charges), professional services (eg brokerage), in-person services (eg ticket sales) should be within its scope.

Options for calculating the charge
While you might assume that an OST would apply to online/remote retailers, the call for evidence also asks whether it could be applied to an online marketplace (facilitator), or even the business delivering the goods.

For vendors, the document puts forward two core proposals: a low tax (1-2%) on the profits of online sales falling within OST, or a flat/fixed charge per transaction. While many might think that a “sales tax” sounds very similar to VAT, the call for evidence makes it clear that differential rates of VAT for online/remote sales are not being considered as an option – indeed, the consultation is being conducted by the corporation tax team at HM Treasury rather than the VAT team. Complexity is given as the reason for discounting a VAT-style design for an OST, but this may seem rather odd, as VAT is one of the cheapest taxes to collect in terms of HMRC staffing and time. One might suspect that the VAT route would be perceived as a new tax on consumers rather than businesses and that this is perhaps more of a driver in the government’s thinking.

Impact of an OST
Of course, any new tax on business will ultimately feed through to higher costs for individual consumers, and the consultation seeks views on how closely price rises would correlate to the new tax charge. Beyond considering how businesses are likely to manage their margins, the government is also concerned about the potential impact on business innovation in new online markets and whether an OST will have a different impact on different consumers - for example, would disabled consumers be disproportionately affected, and whether environmental issues should play a large role. For example, if OST was as a flat charge on each delivery, would this change consumer behaviour and bring environmental benefits, or should the tax be based on the business’s environmental footprint?

Making an OTS effective and workable
As you would expect, the government is seeking views on how to meet the objective of raising funds to subsidise some business rate payers (although which businesses would benefit is not part of the consultation) in an efficient way that is easy to administer for both HMRC and taxpayers. In this context, it envisages that small business may be effectively exempted from the tax by setting a threshold or allowance below which the OTS would not apply. Clearly, this makes sense, although deciding on a precise threshold could prove difficult and divisive.

Another controversial element is the administrative cost of the new regime. Depending on how the charge is structured, many businesses would have to adapt their systems and potentially develop or buy new software to ensure accurate reporting of their revenues and transactions. HMRC’s past assessments of such costs (for example, in relation to Making Tax Digital for VAT), were felt by many to be an under-estimate. The call for evidence also seeks views on appropriate payment and reporting arrangements for OST.

BDO’s view
The way that this call for evidence has been carried out, and its terms of reference, make clear that we shouldn’t expect to see an OST hit the statue books any time soon. However, the government is committed to repealing its current Digital Services Tax for multinational online businesses when it implements the global minimum corporate tax rate reforms from the OECD. That may lead to yet more public pressure for an online sales tax, despite the obvious controversies that the new tax would create.

The BDO Network will be responding to the call for evidence and, as its results will inform the design and perhaps even the likelihood that any OST is eventually created in the UK, we recommend that businesses with online and remote sales should also take a close interest in the proposals and have their say by responding to HM Treasury. 

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