Online sales tax proposal does not click with tax experts

The Chartered Institute of Taxation (CIOT) has challenged the case for introducing an online sales tax to fund new Business Rates reliefs. The Government itself suspects that these reliefs will lead to higher commercial rents, so benefiting landlords rather than retailers. In any event, it is disproportionate to introduce a whole new tax as a way of dealing with issues with an existing one.

The Government says the main policy aim behind an online sales tax would be to ‘rebalance taxation of the retail sector’ between online and more traditional physical retailers such as those in high streets. To achieve this, the revenues from any online sales tax would be used to reduce business rates for ‘bricks and mortar’ retailers. The CIOT appreciates that at this stage there is no decision made on whether an online sales tax is going ahead.

Gabby Donald, Chair of CIOT’s Indirect Taxes Committee, said:

“Designing and implementing a brand-new tax to remedy perceived unfairness in the business rates regime is a disproportionate way of addressing the challenges facing the high street. It is better to modernise the business rates system – something that is long overdue.

“You cannot overestimate the complexity of introducing a tax that requires all transactions to be deemed in or out of its scope, especially where borderlines exist such as goods versus services, business versus private consumers, and the nature of any exemptions or special rules.”

The CIOT points out that evidence (reflected in the Government’s own consultation document) shows1 that business rates today are ultimately mostly borne by landlords in the form of reduced rents payable by the tenant. This means cutting business rates may simply lead to higher rents. On the other hand, the online sales tax risks being largely borne by consumers in higher prices.

Gabby Donald said:

“We strongly suspect that a decrease in business rates for eligible high value retail shops will be simply offset by an increase in the landlord’s rent, effectively undermining the purpose of the online sales tax – so bricks and mortar retailers are no better off and online consumers will suffer increased prices.”

The Government should make clear where it intends the burden of the proposed tax changes to fall. If a tax is applied to online sales, the CIOT recommends the Government shop around to look at whether to modify the VAT system to generate the income necessary to fund business rates changes.

Gabby Donald said:

“An alternative is to discretely increase the VAT rate on taxable supplies that fall within the scope of an online sales tax. Like an online sales tax, an increase to VAT could also be borne by the consumer, but likely less burdensome for HMRC and businesses in the sense one tax is simpler than two – and does not add to the UK’s bulging basket of taxes. Businesses would not need to learn the rules of an entirely new tax and spend additional resources in its administration.”2

In its response to a Treasury early-stage consultation,3 the CIOT also recommends any online sales tax should be applied uniformly, UK-wide, to reduce the scope for still further complexity. Its design should mirror definitions and processes already embedded in VAT legislation to reduce confusion for businesses and their customers. This should include considering the Government’s social policy reasons for not having VAT (or a reduced amount) on certain supplies and considering if it is appropriate to impose a new sales tax for such supplies (accepting that any exemptions weaken any potential ‘rebalancing’ between online and physical sales).