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How would an online sales tax work? 5 views on the controversial tax

3-minute read

Sam Bromley

14 June 2022

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HMRC says that it hasn’t made a decision about whether to introduce the controversial tax and is seeking views about the proposal instead.

Retailers and high street businesses are divided on the idea. Here are five viewpoints, from the advantages to the disadvantages. Where do you stand?

What is the online sales tax and how would it work?

As HMRC hasn’t made a decision about introducing an online sales tax, there aren’t confirmed details about how it might work.

HMRC’s consultation on the tax suggests two options:

  • a low tax of one to two per cent on the profits of online sales subject to the tax
  • a flat or fixed charge per transaction

Many retailers and other businesses operate both in physical stores and online. This complicates the proposal, as these businesses would be double taxed.

Plus there are questions around what counts as an online sale. For example, customers can often order something online and then pick it up from a physical store.

While HMRC believes an online sales tax could fund business rates relief, the consultation document also notes that a one to two per cent tax “would not raise sufficient revenue to replace in full the business rates levied on retailers”.

5 views on the online sales tax

1. The tax will ‘damage shops and our high streets further’

The BBC reports that British high street staple Marks & Spencer believes an online sales tax will ‘punish’ the retailers it plans to support.

The chain’s chief financial officer, Eoin Tonge, said that retailers who operate both online and physical shops would have less money to invest in high street stores.

So, far from helping the high street, it would damage the shops that need the most investment to “bring them back to life”.

2. UKHospitality welcomes tax to cut business rates

Industry trade body UKHospitality would like an online sales tax to fund a reduction in business rates.

It claims that the hospitality industry overpays by £2.4 billion each year through the current business rates system.

UKHospitality wants HMRC to cut business rates through a reduced multiplier for “all relevant businesses and not focused solely on smaller businesses”, like small business rates relief.

But UKHospitality stresses that the system must avoid ‘double taxation’ if a service is ordered online but delivered in-person (for example, hotel stays).

It also says an online sales tax should have an allowance below which no tax is charged.

3. Independent shops also open to an online sales tax

Smallbusiness.co.uk reports that The British Independent Retailers Association (Bira) signed a letter sent to the Chancellor, Rishi Sunak, which said that retailers both big and small are open to an online sales tax to cut business rates.

A new lobby group called the Retail Jobs Alliance sent the letter. The lobby group’s members include Tesco, Sainsbury’s, and Waterstones.

Andrew Goodacre, chief executive of Bira, told the Financial Times: “It’s really hard to find a position that pleases all of your membership. But according to our surveys, the majority of members are in favour of an online sales tax that taxes big companies like Amazon more than it does them.”

Tesco has previously called for a one per cent online sales tax to hit online competitors like Amazon.

4. Retailers expect tax burden to fall on consumers

In their own letter to the Chancellor, a group of 11 businesses and industry groups including Currys, Asos and Made.com suggests that a tax would overburden consumers already struggling with the cost of living crisis.

The Telegraph reports that the retailers believe they wouldn’t have much choice about passing on the tax to consumers.

Echoing Marks & Spencer’s concerns outlined above, the group says that an extra tax would “stifle retail innovation and investment” precisely when it needs it most.

5. Finally – everyone can agree on the need for business rates reform

While different businesses and trade groups disagree on the merits of an online sales tax, everybody can agree on the need for a reform to business rates.

In fact, the Institute of Chartered Accountants in England and Wales (ICAEW) believes that HMRC is complicating matters by focusing on the two issues together.

They suggest: "the policy discussion could look at how online businesses should be taxed. This would likely facilitate a more holistic look at the tax system and creates fewer constraints.”

The group is unsure that a new tax would address the imbalance anyway, considering that many retailers have adopted a hybrid offline-online model and would be taxed twice.

The government reviewed business rates last year but failed to recommend full reform. Instead, changes included revaluations taking place every three years (instead of five) starting from April 2023, plus a freeze in the multiplier for 2022-23.

What do you think about the online sales tax? Let us know by voting in the poll below (and leaving a comment, too).

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Photograph 1: deagreez/stock.adobe.com

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