Online sales tax: A new tax for the digital age?

In February, the UK Treasury published a new consultation titled: ‘Online sales tax: assessing an option to help rebalance taxation of the retail sector’. This wide-ranging consultation asks whether the UK should introduce an online sales tax (OST) and, if so, what form it should take?

Why an online sales tax?

The rising popularity of online retail and the decline of the high street have been accelerated by the pandemic. This has led some to argue that traditional retailers carry an unfair cost and tax burden compared to their online competitors.

The idea is that an OST would address this imbalance and level the playing field between bricks and mortar stores and online retailers. The stated aim is not to discourage online shopping, but rather to use the revenues generated by an OST to reduce business rates for retail properties.

However, there are plenty of potential problems which would need to be addressed if the UK were to introduce an OST, not least defining its scope and the accompanying charging and collection mechanisms.

What is (and isn’t) an online sale?

A key area explored in the consultation is how ‘online sales’ should be defined if an OST were to be introduced. The pace of technological development makes this a difficult task, as there is a range of different types of sale which could arguably be deemed to be ‘online’.

At one end, orders placed and paid for through a website/app and delivered to a customer can easily be classed as ‘online sales’. But what about other remote sales such as those made through instant messaging, social media, email or even telephone and mail ordering? What about goods ordered online but paid for on delivery, or in-store purchases made using an app or terminal?

A particular focus in the consultation is whether ‘click and collect’ orders should be exempted from the OST entirely. However, even this is not clear cut as there are different types of click and collect – some of which (such as collection from unstaffed lockers) have very little connection to physical retail premises.

OST: What transactions will be in scope?

Beyond the definition of ‘online sales’, another key area the consultation explores is exactly what types of transactions an OST should apply to. This includes considering whether an OST should apply to goods only, or goods and services.

Most OST proponents believe it should only apply to tangible goods, which would certainly seem the easiest way to go from a practical perspective. However, it may still at times be difficult to tease out goods from associated services – such as with delivery of takeaways or groceries.

Beyond this, there are also questions about the treatment of digital equivalents of physical goods (such as eBooks and online newspapers) and whether there is a case to exempt certain goods from an OST, in a similar way to VAT.

The consultation sensibly suggests an OST should apply to ‘B2C’ sales only – i.e. those made by businesses to consumers. This would, however, require retailers to be able to practically identify and exclude sales to other businesses. The consultation explores a number of potential approaches for this, including identifying business customers, and excluding businesses that mainly sell to other businesses from the OST entirely, or focusing on the nature of the goods or services sold.

OST: How will it work?

The consultation suggests that an OST would be levied and collected by the online seller, in a similar way to VAT. However, it would only apply to sales made to UK customers. Whilst these suggestions appear sensible, consideration will have to be given to the role of online marketplaces, and how cross border transactions are treated.

The good news is that it appears there will be a threshold or allowance to exclude smaller retailers from the scope of any OST. Although no level is proposed in the consultation, commentators have previously suggested that this could be set at £1m to £2m of taxable sales.

For those in scope, the consultation proposes two potential mechanisms for calculating the OST due:

• A revenue-based approach, applying a specific percentage to the value of relevant sales made
• A flat fee approach based on the number of online orders made.

Of these, the favourite appears to be a revenue-based approach, on the grounds it would be less distortive and more proportionate than a flat fee which takes no account of the value of individual orders.

No proposal was made as to what rate the OST might be charged at. However, a rate of  1% to 2%  has been suggested previously.

When it comes to compliance, the consultation proposes that a VAT-like approach of quarterly payment and filing may be suitable.

What’s next?

The UK government has not yet decided whether to introduce an OST, and any announcement is likely to come later this year at the Autumn Budget.

In the meantime, the retail sector and its advisers may wish to consider responding to the consultation before it closes on May 20.