The Treasury is calling for evidence on the relative merits of business rates and whether they should be bolstered by an online sales tax.
As a tax on the rental value of non-domestic property, some argue that the business rates system imposes an unreasonable burden on retail, where property is a major business input. Some commentators argue that the business rates system creates a distortion within the retail sector, favouring online retailers that can operate without the high-value properties that are a feature of more traditional retail. This has led to proposals that the government should levy a tax on companies based on their online sales, and that this could be used to fund business rates reductions for retail properties.
Other stakeholders, including many retailers, are opposed to such a tax. As a fundamentally different tax to business rates, some raise concerns that an online sales tax would simply increase the costs for consumers of many regularly purchased items or make it harder for offline retailers to adapt to changing consumer habits and establish their own online presence. There is also a risk that an online sales tax could, subject to its scope, be distort the market and create incentives to bundle together certain online purchases of goods and services; any new tax should maintain purchasing neutrality and not create incentives for consumers to display this behaviour.
Others have highlighted that businesses occupying more property or more valuable property should expect to pay more under the normal workings of a property tax, and that an online sales tax would penalise more efficient or innovative businesses. These stakeholders have also argued that rates reductions for offline retail incentivise inefficient use of property and ultimately lead to higher rents, with the benefits accruing not to retailers or consumers but to landlords.
Historical trends in online retail sales, and the more recent increases driven by the current pandemic, suggests that while an online sales tax would not replace business rates, it could still provide a sustainable and meaningful revenue source for the government.
While the scope of an online sales tax would need further consideration, it could be levied on the revenues that businesses generate from online sales to UK customers, and focused on sales in direct competition with those carried out through physical premises. Given divided opinion on this idea, the government is seeking evidence on the potential effects.
Call for evidence questions
- What would be the benefits and risks of introducing an online sales tax?
- Which services and products do stakeholders think should be subject to an online sales tax and what evidence is there to support this?
- What evidence is there for the effects of an online sales tax, for example, on changes in consumer behaviour, or prices?
- How could an online sales tax affect the distribution of taxation?
Deadline and next steps
The consultation on these aspects ends on 31 October 2020. The government anticipates setting out preliminary conclusions on the key areas in the autumn, ahead of final conclusions in spring 2021.
