A shopping basket full of concerns about an Online Sales Tax

Speakers from Kingfisher plc (in favour of an OST) and eBay UK (against) were joined by a senior IFS economist and a leading indirect tax practitioner for the first ‘in person’ debate the two institutes have held in London since 2019. The debate was also livestreamed to an online audience who provided many of the questions put to the panel by the debate chair, CIOT President Peter Rayney.

Introducing the debate, IFS Director Paul Johnson noted that the Government is currently exploring the idea of an OST via a consultation, and that Treasury officials were present at the debate ‘in listening mode’ to hear contributions and views. Both Johnson and Rayney said how great it was to be back with a ‘face to face’ audience.

The first speaker, Stuart Adam of IFS, said he was concerned at inevitable complications and distortions with an OST. He noted that there are many questions still to resolve with the proposal, such as whether it applies to services as well as goods, what is considered an ‘online sale’, whether and how business-to-business sales are taken out of tax, and whether the tax is a percentage of sale price or a flat tax per order or delivery. He doubts that an OST will raise enough tax revenue to facilitate a significant easing of business rates unless it has a high rate and/or broad base.

On its impact, Adam observed that "if you tax something more, you get less of it". He thought, though, that it was too simplistic to assume the tax will feed fully through to higher prices for online goods, because a tax on one sector is not the same as a broad-based consumption tax. Higher prices would be part of the mix but other likely effects would be lower wages and fewer jobs at online retailers, lower rents for warehouses (and rises for high street premises) and profits squeezed for online retail (with a rise for offline).

Theory and evidence suggest the main long-term effect of cutting business rates would be higher rents, said Adam, and this led him to speculate that the main beneficiaries, if we introduce an OST and reduce business rates, will be landlords.

Adam concluded: “OST is a good idea, if you think it would be a good idea even if business rates did not exist. If you do not, then I would not introduce one – and personally I don’t.”

The next speaker was Nick Lakin of Kingfisher plc, who trade in the UK as B&Q and Screwfix. He argued in favour of an OST, saying it is not simply good commercially, it is right for society and for the revenues the tax would bring. He praised the ‘retail revolution’ of online shopping which had brought greater speed and convenience to shoppers, but argued that HMRC must ‘adapt or die’, restructuring the tax system in response to these changes. Business rates are, he said, an analogue system in a digital age and in need of updating.

Lakin said an OST would be simple, straightforward and good for customers and the community. It goes with the grain of retail, he believes. To support his view, he cited grocery giants Tesco, Sainsbury's and Morrisons which are calling for an overall cut in business rates for all retail premises, and are open to the possibility of funding this through the introduction of OST. These businesses claim that the punitive nature of business rates does not recognise the pressure physical retailing is operating under and also hands a huge commercial advantage to online players and ecommerce specialists, creating an uneven playing field.

Alasdair McGowan of eBay UK spoke in support of reform of business rates and reducing tax burdens on business, but said an OST is not the answer. eBayUK has no problem with tech firms paying their fair share of tax, such as through the Diverted Profits Tax, but OST is a tax on small businesses, many of which are struggling to get back on their feet post-pandemic, and consumers, he complained, adding that it is also  regressive in that it will hit the poorest hardest.

McGowan described an OST as a tax penalty on the future of retail, saying it would only pay for a slight lessening of business rates. He fears it will follow the pattern of many taxes that were introduced at a low rate only for the rate to keep on going up over the years. He also queried the value of OST with its extra administrative challenges for business and HMRC when the tax take would be relatively small. The Government should instead focus on improving productivity among businesses, he suggested.

McGowan had earlier told attendees that 90 per cent of items on eBay UK are sold at fixed-price (and not in the auctions that the marketplace is famous for) and that two-thirds of sales are B2C (business to consumer). Hundreds of thousands of UK small and medium-sized businesses use eBay to start and grow their business and reach new markets overseas, and nearly half of sellers on the marketplace have their own ‘physical presence’. These sellers are ‘local’, contribute to the local tax base and are ‘real people’ entrepreneurs who are just as worthy of support as bricks-and-mortar retailers.

Gabby Donald, of KPMG LLP, and the chair of CIOT’s Indirect Taxes Committee, cautioned HMRC against rushing ahead with an OST, calling for ‘deep thinking’, because there are risks of unintended consequences with the tax. Like Stuart Adam she identified many unanswered questions about the potential new tax, including its geographical scope – would it try to capture foreign firms selling into the UK? She noted that collection of VAT has sometimes been a challenge in this respect.

There were other questions around the tax’s scope, said Donald. Would it have a narrow scope (eg just B2C goods) or a broad scope covering all goods and services? Would it cover ‘click and collect’? Would service industries on the high street such as betting shops and banks pay the tax to level the playing field with their online competitors? Would businesses with online sales get tax relief from OST because they also have high street premises? What would happen with businesses that do not have recognisable high street rivals, such as a company that sells downloads of computer games?

Donald also worries about the risk of ‘tax on tax’ and ‘cascading taxes’ in respect of OST.

Left to right: Rayney (CIOT President), McGowan, Donald, Johnson, Adam and Lakin

In the Q&A session, former CIOT President Glyn Fullelove asked whether it is more straightforward to just put a small amount of additional VAT on online sales? Nick Lakin of Kingfisher said it could, but it is not as ‘politically sellable’ as an OST; also OST is both a proposal on the table and goes with the grain of where retail is going. Alasdair McGowan of eBay said the idea was administratively simpler than OST, but the Government has a manifesto commitment not to raise VAT. Stuart Adam of IFS, responding to a later question on a similar theme, said if he was minded to go in this direction (rebalancing away from business rates) he would fund a cut in business rates through an increase in VAT applying to all. This would rebalance without creating a new tax, he noted.

Another audience member expressed their concern that taxing online sales to subsidise business rates means consumers in rural areas reliant on online shopping paying more so people in London and urban areas have access to their high street shops. Adam thought it did.

Noting an earlier citation of Scottish economist Adam Smith by Nick Lakin, CIOT Director of Public Policy John Cullinane asked whether, confronted by the problems of business rates, would not Smith or people concerned with ‘levelling up’ look at ways of maintaining the tax burden on landlords rather than burdening the consumer? Adam said fundamentally a large part of business rates is a tax on landowners and we would be replacing that with a tax on sales. He was not sure a giveaway to landlords should be a priority for tax cuts. But Lakin disagreed, arguing that business rates is a tax on retail: ‘we focus on retail cost and one of those costs is our rental costs, the majority of our property in the UK is rented, and the other part is our business rate bill; we do not see the connection that IFS talks to on this’.

An audience member asked whether you could simply charge higher business rates for warehouses. You could, said Lakin, but it was hard to raise large amounts that way.

A questioner from the Local Government Association suggested replacing business rates revenue with a nationally administered OST could be counter to localism. Tax adviser Gabby Donald acknowledged this point but said it was hard to implement an OST other than nationally.

Another question asked about a potential threshold or allowance for OST. Donald said she favours some level of threshold for any OST: “partly because we have a VAT threshold of £85,000 - which is quite high compared to Europe - and even at that level you create something of a ‘cliff-edge’ for what actually are in today’s terms not particularly large businesses. When I look at the challenges and struggles faced by smaller taxpayers at or around that [VAT] threshold in terms of understanding and coping with the burden of administrating, collecting and remitting the tax, I would be quite concerned that introducing a new tax which smaller businesses below that size are required to pay… will be very, very difficult. I would favour a threshold and would probably favour one, in my personal view, at or above the VAT threshold.”

Paul Johnson of IFS asked his colleague Stuart Adam how far down the list of bad taxes an OST would be. Not at the bottom said Adam, identifying SDLT as a worse tax. Would you support an OST even if it was not accompanied by a cut in business rates, Johnson asked Nick Lakin. No, said Lakin.

In response to a question about exemptions from an OST, Lakin said he favours excluding click and collect and B2B (business to business) sales. Online groceries should be covered, he said, adding that major grocers support this.

Concluding the debate, Peter Rayney asked the panel what their recommendation would be to the Chancellor on an OST. ‘Don’t rush into it’, said Donald. ‘Don’t touch it with a bargepole’, said McGowan, saying as well as being wrong policy it would be politically toxic and a ‘VAT increase by the back door’. ‘Embrace change’ and introduce an OST, said Lakin. Adam would put the idea of an OST ‘in the bin’ and reform business rates.

By Hamant Verma, CIOT Senior External Relations Officer

Which of the panellists' comments do you agree with? Give your view to [email protected]

A video of the event is available on this webpage here.