Home Online Work How would an online sales tax work in practice?

How would an online sales tax work in practice?


The government’s consultation for an online sales tax is due to close on 20 May. John Webber, head of business rates at property consultancy Colliers, discusses what impact it could have on the retail sector if one is implemented.

Following last year’s autumn Budget, the government published its final report into the review of business rates in October 2021.

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Within the report, it states it will consider “the arguments for and against an online sales tax”. A consultation was launched by the Treasury from 25 February until 20 May 2022, to look at how the tax could be managed and implemented, as well as the impact it will have on consumers and businesses. If implemented, an online sales tax would be used to fund reductions in the business rates for retailers with properties in England and to fund block grants for Wales, Scotland and Northern Ireland.

The consultation has been instigated following calls from the retail industry for a fairer playing field, and a tax system that does not penalise high street retailers, who pay business rates on their physical stores. Purely online rivals do not pay such a tax and are therefore able to undercut their bricks-and-mortar competitors.

An online tax seems to be a sensible solution for several reasons. The retail sector’s high business rates have been cited as one of the key factors in shop failures and the decline of the high street in recent years. The British Retail Consortium (BRC) highlighted in its Retail, Rates and Recovery: How Business Rates Reform Can Maximise Retail’s Role in Levelling Up report, published last September, that 83% of retailers said it is “likely”, “very likely” or “certain” that they will close shops if the business rates burden is not reduced.

Office for National Statistics (ONS) data show physical retailers pay a disproportionate amount of the business rates burden, compared with other industries – between a quarter and a third (£7.26bn) of the total annual bill, despite the gross value added from retail being less than 10%. Of the total rates bill paid by the retail sector in 2018/19, 94% was funded by the high street and only 6% by online retailers.

This discrepancy is becoming even more marked as online shopping continues to increase in popularity – a trend that was exacerbated during the pandemic. A report by Edge by Ascential entitled Future Retail Disruption 2021-2022, published in November 2021, stated 32% of UK retail sales took place online, up from 29% in 2020 and 21% in 2019. Forecasts indicate that this could rise to 38% by 2026, so it seems reasonable that online retailers should share some of the tax burden.

The industry seems to be largely in agreement. Our recent snapshot survey, published in April 2022, shows that among Colliers’ retail landlord and retail occupier clients, 89% of respondents said they would be in favour of the introduction of some form of online sales tax to take the pressure off business rates. Just 11% disagreed with the new tax. Interestingly, 71% of retailers who already have an online presence supported the new tax, and – unsurprisingly – 100% of those that do not have an online presence support one, too.

Of course, it is not all black and white, particularly as the distinction between online and high street becomes increasingly blurred. There are now many retailers who have both an online and a physical store presence, such as John Lewis and Next, which already pay high business rates on their stores. So if they were to pay taxes on online sales as well, this would significantly increase their bill. As one opponent to the new tax said in our survey, “retail needs less taxation than more”, and another added, “adding another bad tax doesn’t make things right”.

There has also been an argument by Next, Asos and the BRC that introducing an online sales tax will only lead to etailers passing on additional costs to the consumer.

And there would be challenges for small retailers that moved and invested in online retail out of necessity during the pandemic. Some fear a new tax will stifle a burgeoning industry that is helping the economy recover from the effects of the pandemic.

Meanwhile, opinion was divided over click and collect. Of those surveyed, 54% said yes, online sales tax should be paid on these items, while 46% said no.

There are other issues to address, such as whether there should be exemptions to an online sales tax, or whether certain categories of retailer or sale should be subject to a reduction. When asked what should be exempt or pay a reduced tax, 71% of our survey respondents cited sales of essential items, 66% said small retailers, 55% said web-based apps in stores and 52% said digital products.

The government will need to carefully consider how to apportion the new tax in the fairest way.

Given the considerations highlighted above, we believe the ultimate impact on the retail sector will depend on exactly how exactly the government decides to impose the tax, how much it intends to raise from it, and what the monies raised are used for. To achieve a positive impact it is essential any new online tax revenue is used directly to alleviate the high business rates burden on retailers and does not just go into a government black hole, as many detractors of the scheme fear could happen.

For our part, we are also adamant that the introduction of any online sales tax must not divert the government’s attention from the greater need: a fundamental overhaul of the current business rates system. Any new tax must go hand in hand with reform.

Colliers has been a long-term advocate of reform of the current outdated system and its disproportional reliance on bricks-and-mortar retail. We believe in a fundamental rebasing of the multiplier to around 30p in the pound, from current levels of more than 50p, which has made the tax so unmanageable for many ratepayers; a review of the outdated reliefs system; and more frequent (preferably annual) revaluations, so that business rates bills more accurately reflect current rental values – in the case of retail, considerably reducing rates bills.

Rebasing the multiplier

A property’s business rates bill is calculated by multiplying its rateable value (RV) by the relevant multiplier (also known as the uniform business rate, UBR) – small business or standard – and applying any relevant reliefs. The small business rates multiplier is currently 49.9p for every £1 of rateable value, and applies to properties with RVs below £51,000. The standard multiplier for properties with an RV above £51,000 is 51.2p.

We also advocate the removal of downwards transition, so that following the next revaluation, business rates reductions are implemented immediately rather than spreading them over the years of the list in a transitional arrangement, as they did following the last list revaluation in 2017. This meant many businesses in these sectors paid too high business rates for too long and this was a key factor in the demise of brands such as Laura Ashley and others on the high street. This had a major detrimental impact on the high streets of many of the UK’s provincial and poorer towns. It must not be allowed to happen again.

Introducing an online sales tax will not solve all the issues facing the high street and there are several grey areas as our survey shows. But it is a step in the right direction, provided it is properly thought through and is not imposed in isolation. It should be part of creating a much fairer and more balanced system, enabling 21st century retail in all its forms to thrive.

Building back better

Drapers’ Reset Fashion Retail campaign is supporting the industry to recover in three areas:

  • Business rate reform
  • Retail property leasing terms
  • High street regeneration

Find out more and get involved

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