The UK government has published its consultation on a possible new online sales tax (OST), which it is considering as an option to help rebalance taxation of the retail sector. The consultation is available here.
Why is the government considering an online sales tax?
For some time there have been concerns that the UK tax system, primarily commercial rates which apply to physical properties, is exacerbating the problems facing the high street, and there have been calls to introduce a OST to restore the balance between online and physical retail. It is envisaged that a corporate action could be used to reduce business rates for retailers with brick-and-mortar stores, which are typically subject to a higher business rate burden than online retailers who tend to pay commensurately lower business rents and therefore have proportionally lower commercial costs.
Will an online sales tax be permanently introduced?
No. The consultation aims to examine the arguments for and against a TSO, as well as the potential design of such a tax. The government has not yet decided to proceed with a TSO.
How would an online sales tax be different from the UK’s digital services tax?
Digital Services Tax (DST) is a tax on income from the provision of a social media service, internet search engine, online marketplace or advertising service online associated. The UK DST will be removed once the OECD Pillar 1 solution is in place.
The government views any OST that can be implemented differently, with its goal being to reduce trade tariffs for retailers with more valuable physical goods. As is the case with business tariffs, a corporate action would not consider the merchant’s profitability in determining the amount of tax due. The clear implication of this is that, in the view of the government, it would not be affected by a Pillar 1 solution.
How would an online sales tax work?
The government recognizes that there are few precedents internationally for a tax similar to a corporate action, and there are many practical design issues that need to be considered. These include in particular the following:
- Whether the corporate action would apply to goods and services, or just tangible property. A goods-only approach can lead to difficulties in determining whether what has been provided is a good or a service (e.g. take-out) and can lead to a change in value when complementary goods and services are sold together (e.g. delivery/warranty costs could be increased and prices of goods decreased). Particular difficulties can arise in deciding whether digital equivalents of physical goods, such as e-books or video games, should be subject to a corporate action, particularly where the digital goods may be accessible via subscription. If services are included, should they include services (a) that can only be provided in person but can be arranged online (e.g. leisure and hospitality, transportation, household services, repairs and personalization), ( b) which may be provided online or offline (e.g. media, brokerage services such as real estate, gambling, education and healthcare and professional services) or (c ) that are inherently online in nature with no apparent in-person equivalent (e.g., cloud computing and social media)? The consultation notes that options (a) and (c) would deviate from the corporate action’s objective of rebalancing the tax burden between online and in-store commercial activity and would significantly broaden the scope of any corporate action. , and that option (b) could generate a great deal of uncertainty and complexity.
- How an online sale would be defined. There are many different ways to make purchases, which complicates the definition of an online sale. For example, would this include all transactions made over the internet in any form, such as in-store purchases made through an app/terminal? Should click-and-collect transactions be covered by the definition and, if so, should it make a difference whether the product is collected from a retail store or from a locker at a train station? Should transactions made via other remote technologies be captured, such as mail order or telephone, and would it make a difference whether the transactions are highly automated or not? Furthermore, should a simple online reservation be distinguished from an online transaction?
- Whether exemptions would be appropriate. Fewer exemptions would make an OSI simpler to administer and reduce opportunities for avoidance. Furthermore, the consultation notes that exemptions for certain goods (such as foodstuffs, medicines or other zero-rated goods for VAT purposes) may not be appropriate given that business rates are paid by all businesses , regardless of the goods sold, and that the exemptions would mean that retailers of exempt goods would benefit from business tariff relief without their online sales of exempt goods being subject to a corporate action.
- Whether an online sales tax should extend to online business-to-business transactions. Although still under consideration, the consultation notes that the case for excluding B2B online sales seems very strong, not least because the rationale for a corporate action appears to apply less clearly to B2B transactions. and that it is possible for multiple layers of taxation to be created in supply chains, increasing the price of the item sold at each stage. The consultation excludes the adoption of an input tax recovery VAT system. If a corporate action is limited to consumers, online sellers will need to identify consumer sales. Several tests are proposed, such as the nature of the goods or services sold, the type of activity of the online seller (mainly business-to-business or business-to-consumer) or the obligation to identify each customer, with each suggestion presenting its own difficulties.
- Who would pay a corporate action. In theory, an OST could be applied to the seller, the marketplace/platform, the delivery company or the consumer, although the consultation notes that stakeholders expect the seller to pay it. The consultation recognizes that intermediaries such as online marketplaces and auctioneers could have a role to play in the administration and collection of a corporate action, particularly where they provide additional services to facilitate the sale (eg delivery) and in the case of foreign sellers.
- Territorial scope and treatment of cross-border sales. The consultation makes it clear that any OST would be limited to sales to UK customers, but would apply to sales from both UK and non-UK sellers. Businesses should therefore identify UK customers, although this may be easier for purchases of goods where a delivery address would be required.
- How an OST would be calculated. Two options are currently under consideration. First, a revenue-based calculation of perhaps 1-2% of the value of affected sales, with a potential cap to prevent the cash tax cost of high-value purchases from discouraging online sales in favor of those at the store. Second, a flat fee based on an online sales metric, such as the number of online orders, items sold online, or deliveries made. While the second option may be simpler to administer, it is considered less proportionate and more likely to be regressive. At the extremes, fixed charges may exceed the underlying value of the item sold, and some of the metrics may be difficult to apply to subscription services where goods or services are delivered regularly.
- Whether a threshold or allowance would be appropriate for smaller businesses or those with a lower proportion of online sales (including overseas sellers with low levels of UK sales). The consultation notes that stakeholders have suggested that a revenue threshold of £1 million or £2 million of taxable sales might be appropriate, and that additional threshold conditions could be set to further restrict the number of companies subject to a corporate action (for example, based on the number of online orders a company completes in a year). A threshold would mean that once a company exceeds the relevant level, all of its sales would be subject to OST, while an abatement would avoid creating the edge of the precipice by only subjecting OST to sales exceeding the relevant reduction.
- How and when a corporate action would be reported to HMRC. The government believes that quarterly returns and payments, similar to VAT, would be the preferred option, although businesses may find it easier to use figures from annual accounts and therefore prefer annual reports.
What happens next?
It is clear that the government has not yet decided to implement a TSO, and that many challenges remain in the design of such a tax. The consultation is designed to inform government policy considerations and to enhance government understanding of the issues associated with pursuing an OSI. The consultation closes on May 20, 2022.
While any revenue estimate is very difficult when the scope is so uncertain, the consultation notes that initial internal estimates suggest that a revenue-based OST with an allowance of £2m, levied at a rate of 1 % on online sales of business goods to single and non-service consumers could raise around £1bn a year. The consultation also notes that it is not clear whether, in the longer term, any reduction in business rates would simply lead to higher rents in all cases. Both of these comments call into question whether the complexity of a new tax is the right answer to the challenges facing the physical retail sector.
The design of any OST will also need to take account of the UK’s international commitments, particularly in light of the OECD Pillar 1 negotiations and the commitment to remove, and not introduce in the future, any DST or other relevant similar measurement.