An Online Sales Tax: a counterproductive proposal that won’t deliver for UK businesses or consumers
On Friday, May 20, HM Treasury closed the consultation on the Online Sales Tax. The OST is a levy on sales made online. The rationale of this new proposed tax is to "rebalance" the tax system by increasing taxes on online shopping, in order to raise revenue from the growing volume of online retail, to fund Business Rates reliefs.
In a context where greater business investment is needed to boost economic growth to reverse the UK’s current economic slowdown and the increased cost of living, techUK finds it unfortunate that Government is considering an online sales tax which would increase costs for businesses and prices for consumers.
At this stage, the Government has not yet decided to proceed with an OST or determined the precise design and scope of such a tax were it to be implemented. Through its consultation the Government sought feedback from stakeholders on the viability of such a tax and on its design. Responding to the consultation techUK engaged with our members and broader stakeholders and provided some key arguments to inform why we believe the OST is not a suitable policy choice, while also making suggestions for how the Government could achieve the underlying aims of the OST via other routes. These include:
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An OST has the potential to further increase prices for consumers
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An OST will discourage digital adoption among SMEs
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An OST assumes a sharp distinction between the physical and the digital, which is no longer the case
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An OST will negatively impact SMEs: affecting competition and consumer choice
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An OST will not address the core problems facing our high streets
1. An OST has the potential to further increase prices for consumers
The UK is currently facing a very difficult economic landscape. Economic growth is projected to be low, and inflation is forecasted to be high and more persistent than other countries. The result is that real wages have decreased while both consumer and business confidence have been weakened.
In this complex scenario, technology empowers consumers opening the door to a wide range of options for them to choose from based on their price needs. Today, around 26% of sales are conducted online in the UK and the trend is a clear move towards consumers conducting more of their shopping online.
This means, however, that proposals for an online sales tax risk being felt by consumers like a back door increase in VAT on a large proportion of their retail purchases. Coming at a time when concerns about the tax burden and cost of living are running high.
In fact, Treasury’s own analysis in the Final Report on the Review of Business Rates shows that an online sales tax would have a disproportionate impact on low-income households at a time when inflation and the cost of living is already squeezing wallets, something that the Chancellor recognised at the Spring Statement 2022, outlining a plan for a low tax economy that supports families thought this difficult time.
techUK believes this is not the time to increase the burden on consumers and businesses and therefore advises HMT not to move forward with an OST.
2. An OST will discourage digital adoption among SMEs
Across the economy, digitisation is seen as vital to the pathway back to growth. Almost every economic sector and major public sector organisation have growth strategies based on the increasing use of digital technologies. Meanwhile, capital expenditure (which is often invested in technology and digitisation) remains a core priority across the economy, despite increased uncertainty.
techUK believes that in order to grow, create jobs, generate investment, the UK economy needs to accelerate the pace of digitalisation. The Government has recognised this developing a welcomed agenda to promote digitalisation though the Help to Grow: Digital Scheme. However, an online sales tax contradicts the objectives of these initiatives and discourages companies from selling online, as they will be extra taxed by these activities.
An OST may also undermine other policy interventions aimed at boosting digital adoption across the UK such as the Scottish Government’s Digital Boost Programme and the North of Tyne Combined Authority’s £10 million investment in its digital economy and SMEs.
3. An OST assumes a sharp distinction between the physical and the digital, which is no longer the case
The line between digital and physical has blurred to the point that there is almost no differentiation at all. Indeed, the OECD BEPS Action 1 report of October 2015, concluded that because the digital economy is increasingly becoming the economy itself, it’s not feasible to ring-fence the digital economy from the rest of the economy.
One of our main concerns with the idea of introducing an OST is that it assumes that ‘offline’ and ‘online’ businesses are mutually exclusive, and that one can – and should - be taxed to support the other. As acknowledged in the consultation document, the reality is that UK retail businesses are becoming increasingly omnichannel, with the majority of UK retailers planning to invest more in multichannel capability in the near term.
If applying binary distinctions between channels is challenging enough today, it will become even harder in the future, as the pace of integration continues. Any tax regime should reflect the fact that most companies will use both blended digital and non-digital channels. Distortions in the market would likely be introduced where two very similar activities inadvertently receive a completely different tax treatment.
4. An OST will negatively impact SMEs: affecting competition and consumer choice
According to techUK member Etsy’s seller census for 2021, there are now approximately 1 million creative entrepreneurs in the UK operating just in the Etsy marketplace, a 46% rise over the previous year and the biggest increase in new sellers across all global markets. Selling through this platform is a supplementary activity for over two-thirds of these creative entrepreneurs, accounting for 9.9% of household income. 96% operate their businesses from their homes, 83% identify as women, 30% have children at home, and 30% utilise money from their creative business to support household expenditures such as bills, rent, and food.
For small and micro businesses, particularly in the start-up phase, entrepreneurs selling through online marketplaces often have full time jobs to keep their business running and many of them would like to be committed to their business on a full-time basis. However, these companies are usually not profitable during the first years of operation. Levying an OST will lead to higher prices (if the tax is passed on) or higher costs (if the tax is absorbed) and therefore lower revenue and profits for many of these small businesses. Accordingly, the attractiveness of opening a business will decrease, impacting the entry of new companies and, ultimately, competition.
5. An OST will not address the core problems facing our high streets
The rationale of this new proposed tax is to help high streets and "rebalance" the tax system. However, as stated by retailer company, Marks & Spencer, ‘an additional tax burden would make it harder for them to invest in what is needed to survive and grow in the modern, digital era.’
A recent report by techUK proposes supporting high street businesses and local authorities to leverage digital technologies such as augmented reality, virtual reality, QR codes, blockchain, personalisation, contactless payments, and supply chain management software to help increase footfall, attract customers, and improve business prospects in the long term.
Through these types of positive interventions technology can play a major role in putting high streets back at the centre of local economies and communities, guaranteeing their future in a more systemic way. This should be the focus of Government rather than a potential harmful and regressive Online Sales Tax.
techUK does not believe that the Government should implement an online sales tax and should instead seek to further work with businesses and trade organisations to design positive interventiosn to support high street businesses as well as address concerns around the effects of the business rates system.
You can find techUK’s full response to Online Sales Tax consultation here.
Neil Ross
As Associate Director for Policy Neil leads on techUK's public policy work in the UK. In this role he regularly engages with UK and Devolved Government Ministers, senior civil servants and members of the UK’s Parliaments aiming to make the UK the best place to start, scale and develop a tech business.
