ICAS response: online sales tax
By Susan Cattell, Head of Tax Technical Policy
16 June 2022
Susan Cattell outlines the key points from the ICAS response to a Treasury consultation about the possible introduction of an online sales tax in the UK.
Background
The Treasury published a consultation: ‘Online sales tax: Assessing an option to help rebalance taxation of the retail sector’. Against a backdrop of the rapid growth in the proportion of shopping carried out online – accelerated by the pandemic – the consultation considered the possibility of introducing an online sales tax (OST). Some stakeholders had called for an OST because they regard the business rates system as unduly skewed against bricks-and-mortar retail. The purpose of an OST would not be to replace business rates but to rebalance the tax system by funding reductions in business rates for the retail sector.
The consultation
The introduction to the consultation made clear that the government had not decided to proceed with an OST – or decided on the design and scope of any tax if it were to be implemented. The government wanted to assess the evidence and test the arguments for and against an OST – which was reflected in the detailed analysis of the various options set out in the consultation.
It was clear from the consultation that designing a workable OST would not be straightforward – it posed some difficult questions that would need to be addressed.
ICAS submitted a response to the consultation – our comments fell into three main areas:
Rebalancing the tax system
The consultation foreword noted that those calling for an OST wanted to rebalance the tax system by funding business rates relief for the retail sector. However, it is increasingly challenging to distinguish between online and offline activity and many businesses operate both in-store and online. The pandemic accelerated existing trends, so that the retail sector has changed significantly in the last two years. It seems highly likely that change will continue. Even if an OST could be designed to fit current circumstances, it seems unlikely that it would remain fit for purpose for long.
Rather than trying to react to changes with a ‘quick fix’ OST, which could, at best, only tackle one aspect of the perceived problem, it would be preferable to look at the bigger, longer-term picture. There is ongoing evolution in how business is conducted, and the fundamentals of the tax system (including business rates) also need to evolve. Anything put in place now should be part of an overarching framework with the flexibility to adapt as the landscape continues to change.
As the consultation itself noted, arguments for an OST focus on the cost of rent and rates but do not consider other costs associated with online retail models such as delivery networks, marketing and technology. It is also difficult to assess the likely impact of an OST on mixed-channel businesses – this would vary depending on the decisions taken around design and scope. It is difficult to reconcile the statement in the consultation, that the government does not see an OST as ‘a measure to discourage consumers from shopping online,’ with the actual proposals.
The consultation also noted the risk that if business rates for retailers are reduced, rents will increase – removing or reducing any benefit for high street retailers who do not own their premises. If there is a strong possibility of this happening, it would undermine what appears to be the main argument being advanced in favour of an OST. ICAS suggested that further work should be undertaken to assess how far the main beneficiaries of an OST would be landlords rather than retail businesses.
Complexity and administrative burdens
The consultation provided a detailed analysis of how complex an OST would necessarily be. As the questions about determining the scope of any OST illustrated, whilst the concept of taxing ‘online’ retail might sound straightforward, in reality it would be difficult to define what would be taxed and difficult for businesses to administer. For example, ICAS agreed with the suggestion that business to business (B2B) sales should be excluded from an OST – but this would be complex to administer for businesses with mixed sales – and potentially open to manipulation.
Further issues emerged when considering the design of a possible OST. Given the stated aim of rebalancing the tax system, it would be a reasonable assumption that the OST would apply to large online marketplaces. However, the consultation proposed that it would be inappropriate to aggregate online sales, either by franchisees or through a marketplace, in determining whether a business should be subject to an OST – instead, it should be determined on the basis of the individual businesses’ activities. ICAS agreed with the reasoning behind this proposal (to keep small businesses out of scope) but the outcome, of reducing any OST paid by large online marketplaces, seems to run counter to the overall stated aim of introducing an OST. This seems indicative of a lack of clarity around the intended targets of an OST.
An OST would not simplify the tax code and would certainly increase burdens on businesses – on top of other changes, for example, the plastic packaging tax, Brexit-related changes to customs and excise and the Health and Social care levy. It is undesirable to create a new tax (essentially to try to address problems with another tax, ie business rates) which would require associated data systems and review processes, and would be costly and time consuming to administer.
There would inevitably be pressure to replicate some of the reliefs and exemptions in the VAT regime, in an OST, to protect some vulnerable consumers; this would add to complexity. For example, some reliefs from VAT are available for disabled and older people.
VAT
As the consultation noted, there is a risk that using revenues from an OST to reduce business rates for retailers would not, in practice, assist many high street retailers. Other forms of support for high streets might be more effective. However, if the government decides that revenues are required, either to reduce business rates, or to fund other forms of support for the high street, ICAS suggested that using the VAT regime should be considered as an alternative to an OST. Businesses are already familiar with operating VAT and have the necessary systems in place. Adjusting the VAT regime to raise additional revenues from the provision of certain goods and services would be simpler to administer than an OST.
Additionally, using VAT rather than an OST, would mean that some of the issues raised in the consultation would not arise. For example, VAT deals with the issues raised around B2B sales, and it includes a threshold which keeps very small businesses out of scope. As far as possible, existing VAT categories and definitions could be utilised to minimise the creation of new areas of uncertainty. New boundary issues might be created but these are already a feature of VAT; additional HMRC resources to provide timely rulings would already be useful and would be essential if additional boundary issues were created.
The consultation considered whether an OST should take a revenue-based or flat-fee approach. We agreed that a revenue-based approach would be preferable. Whichever approach is adopted, we anticipate that the OST (like other costs of doing business) would be passed on to consumers. VAT already uses a revenue-based approach, supporting the suggestion that using the VAT regime would be preferable to introducing a completely new tax. Post-Brexit, the UK also has greater flexibility to make changes to the VAT regime.
Let us know your views
ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by Members. We welcome Members’ input to inform our work – please email tax@icas.com to share your insights and feedback.