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UK Treasury publishes consultation on online sales tax

Online sales tax debate focuses on assessing options to “rebalance” taxation of the retail sector

The UK Treasury has launched an early-stage consultation on how online sales taxation might be rebalanced in the retail sector.

The consultation follows the changes the sector has experienced as a result of the pandemic, including a rapid growth in online shopping, and will analyse the potential tax imbalance between in-store and online retailers.

Some stakeholders suggested the tax system puts in-store retailers under additional strain. This led to a review into business rates, which concluded they should remain in place as they fund local services and there is no alternative to replace them.

To rebalance the tax system and fund business rates relief for retailers, the government is now debating the possibility of an online sales tax (OST). “Given the significant changes in the retail market and shift online, it is right that the government reassesses the taxation of this sector,” the consultation paper said.

Under the consultation, which was among the pledges outlined in the Autumn Budget, the government will analyse the case for and against the implementation of OST, and how it would address the challenges currently faced by retailers, as well as the effects on consumers and businesses prior to a decision on that front. The consultation will run from 25 February to 20 May 2022.

“While we’ve made no decision on whether to introduce such a tax, it’s right that, given the growing consumer trend to shop online, we work with stakeholders to assess the appropriate taxation of the retail sector,” said Lucy Frazer, financial secretary to the Treasury.

However, the Treasury is recognising that implementation “would not be straightforward” as the difference between online and offline activity in retail becomes increasingly blurry. The idea is to gather views across areas such as which transactions would be taxable, the forms an OST could take and how to define an online sale.

The government expects the consultation to attract a range of different opinions. For example, retailers with a strong physical presence will say the sector is “overburdened” by business rates versus online firms in the same space. Conversely, others will view increasing competition in the online space as a demonstration of innovation and growing consumer choice options which should not be taxed further.

“Technological change, innovative business models and evolving consumer choice have for generations changed the face of our towns and cities, transforming the way we live,” the consultation paper said. “The government recognises the value of vibrant high streets and town centres to local communities as places to live, work and visit.

“Town centres have evolved continuously, and the government does not intend to disrupt innovative businesses; however, it is important to remain responsive,” it added.

Trade association TechUK pointed to the government’s own analysis, which says that OST would be “regressive with the greatest impact on lower income households”.

“Over the last 10 years, the difference between online and offline sales has become smaller and smaller,” said TechUK’s chief executive, Anthony Walker, adding that the trend was further accelerated by the pandemic.

“Proposals for an online sales tax therefore risk becoming a general sales tax on consumers and businesses when concerns about the tax burden and cost of living are running high,” he said. “For that reason, we do not believe that the government should proceed with the online sales tax.”

Walker noted that the government is incentivising companies to adopt e-commerce solutions through the Help to Grow: Digital scheme, which this proposal would tax them for using. “This announcement is therefore confusing and sends mixed messages to businesses,” he said.

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