UK government considers need for new online sales tax – Tax

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The UK government has launched a consultation on a possible new online sales tax (OST). As a new and potentially complex tax on the digital economy, a TSO presents a number of challenges in terms of scope and design, which can be difficult for the government to overcome.

Background

The government receives significant revenue through ‘business rates’ (a tax borne by UK businesses and set at levels linked to the value of a business’s premises). It has been suggested that high street retailers bear the burden of these tariffs disproportionately, compared to their online competitors – a situation made worse by the COVID-19 pandemic. Following a review, the government reaffirmed its commitment to supporting ‘bricks and mortar’ street retailers, including through short-term cuts to their business rate bills. To help fund possible longer-term solutions and further rebalance the taxation of the retail sector, the government is testing the case for a corporate action.

Scope and design

An OST would be a brand new tax on online sales for which the government acknowledges there is “little precedent” in other jurisdictions. The consultation sets out several fundamental and potentially complex questions that the government will need to answer in order to make an OST viable while generating sufficient revenue. Key questions include the following:

  • Definition of “online sales”. Should this definition encompass all distance sales – including by e-mail, telephone and mail order – or should it instead focus on online sales, via the Internet? How do click and collect commands integrate? Will a narrow scope give rise to opportunities for avoidance?

  • Just goods, or goods and services? It seems clear that a corporate action should apply to online sales of goods – but what about services, and bundled goods and services like mobile phone contracts? What about online purchases that don’t easily fit into these categories, like take-out orders, or items that can be bought physically or electronically, like e-books?

  • Exemptions. Should certain goods such as food and medicine be exempted for political reasons?

  • Who will collect and account for corporate actions? Suppliers are concerned, but what about online marketplaces? The consultation suggests that a corporate action could borrow from VAT principles by making online marketplaces liable for tax when the seller is outside the UK.

  • Calculation. Two options are being considered: a revenue model (possibly 1-2% of revenue generated by online sales) and a flat-rate model based on the number of online sales made.

There are certain options that the government seems to have already chosen or ruled out. First, as noted above, an OST would be UK-wide and apply to all sellers (with no exemption for online sales by sellers outside the UK). Secondly, it appears the government wants to exclude all B2B online sales from the scope of a corporate action, after ruling out the alternative idea of ​​a VAT-style input tax recapture system for businesses. .

OST and international tax reform

Tax authorities around the world are scrambling to find new ways to tax the digital economy. The government is keen to position an OST as a targeted, long-term intervention, distinct from other similar forms of taxation, such as the UK’s own digital services tax (which taxes revenue generated from social media, search engines, research and online marketplaces). As part of an international agreement on tax reform, the UK has pledged to repeal its digital services tax (once the OECD’s ‘Pillar 1’ solution has been implemented) and not to introduce “relevant similar measures”. It remains to be seen how a corporate action could be reconciled with this commitment.

Is an OST the right answer? Jury still absent.

The government will need to consider whether the revenue expected to be raised from a corporate action (£1bn per year, based on a 1% rate and a number of assumptions) will be sufficient to justify the introduction of a complex new form of taxation. Economic theory suggests that a corporate action might not even achieve its objective if, for example, a drop in business rates leads to an increase in rents.

Next steps

Opinions are sought by 10.00am on 20 May 2022. Further details (including the consultation document) are available on the UK Government website.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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David A. Albanese