Online sales tax could ‘raise prices and cut wages’

Proposals for an online sales tax have divided opinion, with some saying it could drive up prices and discourage people from buying goods and services over the web, while others suggest the tariffs businesses are obsolete and industry needs to embrace the digital revolution.

HM Treasury’s consultation on proposals for an online sales tax to ‘help rebalance the taxation of the retail sector’ is due to close next week.

It seeks comments both for and against the implementation of such a tax to help fund business rate relief for the retail sector at a time when footfall remains below its level. before the pandemic.

The government has acknowledged that its design “would not be straightforward” in terms of distinguishing between online and offline activities “reflecting the range of transaction, delivery and collection options”, as well as the forms of tax that may be adopted.

However, given the significant changes in the retail market and the evolution online, “it is right for the government to reassess the taxation of this sector” and “assess the effects on consumers and businesses of the opportunity to proceed with a corporate action”.

Indeed, the pandemic has boosted online sales, with their proportion of all retail sales rising from 3% in 2006 to 22% in March 2020, with many brick-and-mortar retailers saying they bear the burden of commercial tariffs compared to online competitors.

As such, for some, the OST would “level the playing field” between online retailers and brick-and-mortar retailers.

In a debate on “Should the government introduce a tax on online sales? » Organized by the Chartered Institute of Taxation (CIOT) and the Institute for Fiscal Studies (IFS), IFS senior economist Stuart Adam said he was not convinced it would “uniform the rules of the game” or would help the offline industry. In fact, he said it could drive up the prices of goods and services online, cut wages and drive up property rents.

Adam said: “It is widely claimed that the OST would simply be passed on to consumers with higher prices. I don’t think it’s necessarily that simple. But yes, you would see the prices charged by online retailers increase, and to some extent offline competitors would also increase their prices due to less competitive pressure from online retailers.

“We could also see reduced wages at online retailers and again at their competitors or simply fewer jobs. I would expect to see rents drop for properties used by online retailers, warehouses, etc. and increase for retail businesses as demand for commercial goods increased.

“It is also true to say that profits would be reduced for online retailers and, to a lesser extent, increased for non-taxable offline retailers.”

He added that the OST would have to be “large enough” to pay for a reduction in business tariffs, as initial government estimates suggest that for every 1% tax increase on businesses with more turnover of £2m, it would generate £1bn in revenue.

SME and consumer tax

For eBay UK’s Alasdair McGowan, who opposes the OST proposal, the engine of online retail growth is not eBay or Amazon, but the consumer. ‘origin.

“Consumers appreciate the convenience, choice and yes, price competition that online brings. That doesn’t mean we’re getting rid of offline retail. Consumers want both. , touch objects, try them and then buy them. Yes, the high street is changing but we have to get out of the false choice online vs offline. We now live in a multi-channel world and it is here to stay.

“So if we’re going to build back better and deliver the sustainable growth we all want for retail, we need to implement business rate reform, but we also need to see online as an opportunity, not a threat. “

He explained that 300,000 SMEs use the platform and although many are not visible because they are not seen on the main street, “they are real, they are local and they contribute to the local tax base. They are entrepreneurs worthy of our support.”

McGowan added: “This is not a tax on technology, but a tax on SMEs and the consumer at a time when SMEs are struggling to get back on their feet after the pandemic and at a time when households are struggling with a huge increase in the cost of living.

“When we talk about the fairness of this tax, it would be regressive – this is recognized by the Treasury. Like all sales taxes, it would be regressive and would therefore hit the poorest the hardest.

“We hear a lot about the impact on business in this debate, but we must never lose sight of the impact on consumers when households are really, really struggling… and will they want to pay one or two or 5 % extra on their purchase invoice line? I wonder if they would support that.

He said he thought it would be a tax on the future and future growth of retail, making it worse for some high street retailers.

“All retailers should pay their way”

For Nick Lakin of Kingfisher PLC, owner of B&Q and Screwfix, the current corporate pricing system doesn’t work – it was last reformed 30 years ago before online shopping. However, reducing business rates and covering them with a corporate action is a good idea.

He explained that all retailers expect to see an increase in online shopping and that responsible retailers want to help cover the cost of Covid.

He said their argument for a TSO is not just a “business interest”, but “it’s what’s good for society and the revenue these taxes bring in”.

Lakin used the example of Amazon paying trade tariffs of £70million on £20billion in sales. By comparison, B&Q and Screwfix made £6 billion in sales and paid £140 million in tariffs. Meanwhile, high street stalwart M&S ​​had a turnover of £10bn and paid £184m in rates.

“Commercial tariffs disproportionately tax retailers with brick-and-mortar stores, it’s the biggest impediment to growth and the leading cause of store closures.

“Tariffs are an analogous tax and are no longer fair. The system is inefficient and its certainty is increasingly questioned with the growth of online commerce.

“On the other hand, a corporate action can be effective, simple, and secure both future government revenue and the best for society’s consumers. This shift can have significant benefits when all retailers, regardless of channel, can compete fairly.

“It will mean more competition for customers. This means more choices and the best deals for consumers, which will allow the best retail businesses to survive and thrive. With more jobs and investment in our communities, that means better main streets, better retail parks, actually better shopping everywhere and that’s why we support it.

Scope issues

While Lakin thinks a corporate action would be “simple and straightforward”, Gabby Donald, KPMG LLP and chairman, and who sits on the CIOT indirect tax committee, said many questions were being raised about the introduction of a corporate action. .

These include the scope and design of the tax, its implementation, its effectiveness and what it hopes to accomplish.

“Are we looking at a narrow scope, for example goods or B2C goods? Geographical scope, so UK businesses and UK consumers? It risks the argument that it is unfair or distorting.

“Is he going to seek to apply the tax globally, so to any sale in the UK market or to any sale by a UK retailer outside the UK market? This brings its own challenges – how to register and collect such a large tax. »

Donald also asked if services would fall within its scope, so the OST would also apply to banks and betting shops, for example.

The consultation runs until May 20, 2022.

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David A. Albanese