Head of Public Affairs & Public Policy, Phil Hall, walks through the proposals and explains AAT’s objections.
The Government is currently consulting on the case for and against implementing an Online Sales Tax (OST).
AAT has previously said that the business rates system is broken and that fundamental reform is needed, but government proposals for an Online Sales Tax are not the answer.
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As AAT highlighted in its 2021 Budget response, it supports the decision to explore the arguments for and against a UK-wide OST but agrees with former government adviser, Iceland and Wickes Chief Executive Bill Grimsey who questioned why a sales tax should only apply to online retailers. His study suggests that a “sales tax” of 2% on all UK retail sales would produce the same amount of revenue for the Exchequer as that produced by business rates in the retail sector. As a result, the current government consultation represents a missed opportunity to look at the wider advantages and disadvantages of an all-encompassing sales tax that could more effectively help level the playing field between online and bricks and mortar retailers by enabling business rates to be scrapped for all.
If a sales tax is to be introduced, it is highly questionable as to why this should distinguish between online sales and any other form of sales. This is not simply as a principle of fairness (would it be fair for customers to pay different rates for the same item, from the same shop simply because of the nature of the purchase) but recognises the numerous cliff edges, avoidance measures and unintended consequences that an OST would generate. These include but are far from limited to concerns around definitions e.g. does click and collect count as an online sale?
Defining an Online Sales Tax
Whether the distinction is based on the method of ordering, the degree of in-person interaction or the timing and location of the sale, the complexity in defining an OST and how it applies is substantial, the opportunity for distortions and avoidance considerable and the degree of unfairness great.
If an online reservation is made but payment and collection takes place in store, is it reasonable that this consumer pays more than someone who telephoned to reserve an item or reserved the item in person on a previous visit? Likewise, as retailers increasingly operate omni-channel sales, Government will not simply be distinguishing between high street retailers and online only businesses like Amazon and eBay but between the same customers using the same company but who might make purchases in different ways.
Looking to the future, the issue of definitions is only going to get more complicated. For example, an increasing number of consumers are undertaking live video shopping supported by in-store assistants, would that be covered by an Online Sales Tax?
Avoidance of the tax
At a recent meeting of AAT Licensed Accountants it was suggested that many businesses’ first question to their accountant would be, “how can we legally avoid this” and that much gaming of the system around definitions would inevitably occur.
Proposals to exempt business sales open up another minefield of potential avoidance. Not all genuine businesses have a company registration or VAT registration number. Even those that do have a legitimate company registration number may not be making legitimate purchases. For example, personal purchases through a business account are likely to be a problem with limited companies. Three-quarters of these – some 4 million small businesses – are one-person operations with no employees.
The consultation document also states that “the rationale for such a tax is limited to sales to UK customers”, but this is not necessary. As currently proposed, an overseas seller would pay no OST when selling to a UK consumer, and likewise, a non-UK customer would pay no OST when purchasing from a UK based seller.
So, as framed, overseas residents and sellers would receive preferential treatment that undermines the credibility and fairness of the OST and the tax treatment of UK residents. This should not be permitted.
Impact on small businesses
In order to protect small businesses, AAT believes that an exemption that mirrors the VAT threshold (currently £85,000) would protect most small businesses given those operating below the VAT threshold number approximately 3m, accounting for more than half (55%) of all small businesses.
At the same time, we recognise that such an exemption could undermine the Government’s objective of ensuring the OST generates sufficient revenue.
Setting the OST at the same rate as the VAT threshold would have another potential benefit in dealing with Government questions around quarterly or annual reporting. Given Making Tax Digital already requires VAT to be reported on a quarterly basis rather than annual, the OST could be incorporated into VAT returns and undertaken digitally. This would also reduce administrative burdens by removing the need for separate reporting and/or reporting at different times.
An OST that encouraged higher levels of in-store shopping would probably lead to increased travel movements, increased pollution and increased congestion depending on the number of items purchased and the last-mile travel method. As a result, suggestions that reduced online deliveries as a result of an OST is somehow good for the environment is highly questionable.
The Government consultation demonstrates that there is no identifiable policy proposal save for a very vague idea of introducing a new tax in limited circumstances, with limited applicability, that it will NOT replace business rates but may help reduce them for some retailers in unspecified circumstances.
The high degree of uncertainty makes it difficult even for the most passionate supporters of an OST to support these proposals. Indeed, both the CBI and the British Retail Consortium have failed to publicly support or reject the proposals because there is so much uncertainty, as well as very mixed views across their membership.
AAT’s Tax Panel and Digital Advisory Panels were both opposed to the idea of an OST and discussions with AAT licensed accountants also demonstrated little or no support.
AAT has therefore taken the decision to oppose these proposals but to make numerous suggestions for improvement should the Government decide to proceed.
Phil Hall is AAT's Head of Public Affairs and Public Policy.