UK consultation on potential new online sales tax

The UK government has released its consultation on a potential 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 has been concern that the UK tax system, principally business rates which apply to physical properties, exacerbates the problems facing the high street, and there have been calls to introduce an OST to redress the balance between online and physical retail businesses. It is envisaged that an OST could be used to reduce business rates for retailers with physical stores, who are typically subject to a higher business rates burden than online retailers who tend to pay proportionately lower commercial rents and therefore have correspondingly lower business rates burdens.

Will an online sales tax definitely be introduced?

No. The consultation is intended to consider the arguments for and against an OST, as well as the potential design of any such tax. The government has not decided to proceed with an OST yet.

How would an online sales tax differ from the UK’s Digital Services Tax?

The Digital Services Tax (DST) is a tax on revenues from the provision of a social media service, internet search engine, online marketplace, or an associated online advertising service. The UK’s DST will be removed once the OECD Pillar 1 solution is in place.

The government sees any OST that may be implemented differently, with its purpose being to reduce business rates for retailers with more valuable physical property. As is the case for business rates, an OST would not take into account the profitability of the retailer in determining the amount of tax due. The clear implication of this is that, in the government's view, it would be unaffected by any Pillar 1 solution.

How would an online sales tax work?

The government acknowledges that there is little existing precedent internationally for a tax akin to an OST, and there are many practical design questions that need to be considered. These include the following:

• Whether the OST would apply to goods and services, or just to tangible goods.
  
  A goods-only approach may lead to difficulties in determining whether what has been supplied is a good or a service (e.g. takeaways) and may lead to value-shifting where complementary goods and services are sold together (e.g. delivery/warranty costs could be increased and goods prices lowered). Particular difficulties may arise in deciding whether digital equivalents of physical goods, such as eBooks or video games, should be subject to any OST, especially when digital products may be accessed via subscription.
  
  If services are included, should this include services (a) which can only be delivered in person but which can be arranged online (e.g. leisure and hospitality, transport, household services, repairs and customisation), (b) which can be delivered online or offline (e.g. media, brokerage services such as estate agencies, gambling, education and healthcare and professional services) or (c) that are intrinsically 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 depart from the OST's objective of rebalancing the tax burden between online and in-store business activity and would significantly extend the scope of any OST, and option (b) could generate a great deal of uncertainty and complexity.
  
  
• How an online sale would be defined.
  
  There are many different ways of completing purchases, which makes defining an online sale complicated. For example, would this include all transactions conducted over the internet in any form, such as in-store purchases made via an app/terminal? Should click-and-collect transactions be captured by the definition and, if so, should it make a difference if the product is collected from a retail store or a locker in a railway station? Should transactions carried out via other remote technology be captured, such as mail order or telephone, and would it make a difference if the transactions are highly automated or not? Furthermore, should there be a distinction between a simple reservation online and a transaction completed online?
  
  
• Whether any exemptions would be appropriate.
  
  Fewer exemptions would make an OST simpler to administer and reduce avoidance opportunities. Moreover, the consultation notes that exemptions for certain goods (such as food, medicine or other goods zero-rated for VAT purposes) may not be appropriate on the basis that business rates are paid by all businesses regardless of the goods being sold, and exemptions would mean retailers of exempt goods receiving business rates relief without their online sales of exempt goods being subject to an OST.
  
  
• Whether an online sales tax should extend to online business-to-business transactions.
  
  Whilst still under consideration, the consultation notes that the case for excluding business-to-business online sales appears very strong, not least because the rationale for an OST appears to apply less clearly to B2B transactions and there is potential for multiple layers of taxation to be created in supply chains, increasing the price of the item being sold at each stage. The consultation rules out adopting a VAT system of input tax recovery.
  
  If an OST is limited to consumers, online sellers would need to identify sales to consumers. A number of tests are suggested, such as the nature of the goods or services being sold, the type of business of the online seller (majority business-to-business or business-to-consumer) or a requirement to identify each customer, with each suggestion presenting its own difficulties.
  
  
• Who would pay an OST.
  
  Conceivably, an OST could be applied to the seller, the marketplace/platform, the delivery company or the consumer, although the consultation notes that the expectation from stakeholders is that the seller would pay it. The consultation does recognise that intermediaries such as online marketplaces and auctioneers could have a role to play in the administration and collection of an OST, especially where they provide added services to facilitate the sale (eg delivery) and in the case of overseas sellers.
  
  
• Territorial scope and treatment of cross-border sales.
  
  The consultation is clear that any OST would be limited to sales to UK customers, but would apply to sales by both UK and non-UK sellers. Businesses would therefore need to identify UK customers, although this may be more straightforward for goods purchases where a delivery address would be required.
  
  
• How an OST would be calculated.
  
  Two options are currently under consideration. Firstly, a revenue-based calculation of perhaps 1-2% of the value of the relevant sales, with a potential cap to prevent the cash tax cost of high-value purchases discouraging online sales in favour of those in-store. Secondly, a flat fee based on an online sale metric, such as the number of online orders, items sold online or deliveries made.
  
  Whilst the second option may be simpler to administer, it is seen as less proportionate and more likely to be regressive. At the extremes, the flat fee may exceed the underlying value of the item being sold and it may be difficult to apply some of the metrics to subscription services where goods or services are delivered on a regular basis.
  
  
• Whether a threshold or allowance would be appropriate for smaller firms 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 a revenue threshold of GBP1m or GBP2m of taxable sales could be appropriate, and additional threshold conditions could be set to further restrict the number of businesses liable to an OST (e.g. based on the number of online orders a business completes in a year). A threshold would mean that once a business exceeded the relevant level, all of its sales would be subject to the OST, whereas an allowance would avoid creating the hard cliff-edge by only subjecting those sales above the relevant allowance to the OST.
  
  
• How and when an OST would be reported to HMRC.
  
  The government believes that quarterly returns and payments, in a similar way to VAT, would be the preferred option, though it may be that businesses would find it simpler to use figures derived from annual accounts and would therefore prefer annual reporting.

What happens next?

It is clear that the government has not yet decided to implement an OST, and that many challenges remain in designing such a tax. The consultation is designed to inform government policy considerations, and to build the government's understanding of the issues associated with pursuing an OST. The consultation closes on 20 May 2022.

Final thoughts

Whilst any revenue estimates are very difficult while the scope is so uncertain, the consultation does note that initial internal estimates suggest that a revenue-based OST with a GBP2m allowance, levied at a rate of 1% on online sales of goods from business-to-consumer only and excluding services could raise approximately GBP1bn per annum. The consultation also notes that it is unclear whether, over the longer-term, any reduction in business rates would simply result in higher rents in any event. Both of these comments do call into question whether the complexity of a new tax is the right response to the challenges faced by the bricks-and-mortar retail sector.

The design of any OST will also have to be mindful of the UK's international commitments, particularly in light of the OECD's Pillar 1 negotiations and the commitment to remove, and not introduce in future, any DSTs or other relevant similar measures.