Sunak considering introducing online sales tax: this is how it will affect your business?

online sales tax uk government Nov 01, 2021
 sales tax: this is how it will affect your business

‘Around £100bn a year is spent with retailers, and the value of all online sales excluding financial services is £700bn, the Treasury said.’ 

 Small Business UK 


Whilst the deadline of the new budget loomed, murmurings about a 2% online sales tax increase floated around. With Rishi Sunak remaining silent on the issue during the announcement of the 2021 budget, outlining what this means and the implications it will bring to small businesses is important. In preparation for this matter being raised again in the spring, how will this affect small businesses, online businesses and brick-and-mortar businesses?


The announcement of the budget last week was expected to include consultation for the introduction of the sales tax attempting to level the playing field between online retailers and traditional brick-and-mortar retailers. Sunak was already under pressure in the previous week to reveal the overhaul of the outdated business rates system that has caused mass shop closures after putting a delay on this. Being defined as the ‘fundamental review’, a business rates reform was later included in the budget announcement with only minor changes. The budget announcement did not include a new online sales tax, but detailed below is everything currently known about the potential introduction and impact that it would bring. 


Why do the government want to tax online sales?


After the pandemic, a shift for consumers to shop online was inevitable. As uncertainty remained about leaving the home in terms of safety and with many restrictions in place for health reasons, consumers remained online for an extended period of time. Even when there was more freedom within movement and safety measures were increased for returning to brick-and-mortar companies, the online companies had been able to spend more time with a greater volume of user feedback to develop more sophisticated systems. With additional time to build reliable relationships as well with these consumers, they were able to retain their new customer base. With a bias moving towards online shopping, independent high-street retailers are then stuck with high business rates that the online companies don’t have. In an attempt to make this fairer amongst retailers, Sunak’s inclusion of an online sales tax for online sales and home deliveries is to move things back to a more equal balance between online and on the street who have to pay much higher business rates in comparison. 


How far have they got in making these changes?


Treasury officials are still working on the new online sales tax. According to the Daily Telegraph, they need to establish and decide which goods and services would be covered under this and who would be exempt. 


What taxes will there be?


There are conversations suggesting that the online sales tax might involve two new taxes. One is a levy on all goods that are bought online and one on consumer deliveries. Both of these taxes would directly impact the consumer as it becomes unlikely that retailers would be able to absorb these costs like other taxes currently in place. Nothing about whether an online sales tax will apply to online services has been talked about yet. In April of 2020, Phillip Hammond’s digital services tax came into effect targeting large US tech companies and is currently the only online service tax. So narrowly targeted, it was aimed at companies who make more than £500m a year globally. More on this can be found here: Hammond targets US tech giants with 'digital services tax' | Budget 2018Digital Services Tax 


Did they announce anything in the recent 2021 budget?


On October 27th, the delay of the business rates reform was greatly commented on. So intertwined with the introduction of an online sales tax it appears that there are still many things that need finalising. With a great deal of upheaval still surrounding the economy from the Covid19 pandemic, this is likely to materialise after great deliberation. But as yet, nothing about an online sales tax has been announced in the 2021 budget or anywhere else. 


When will we find if there will be a new online sales tax?


Anything in regards to a digital levy or online sales tax is estimated to be revealed in the spring. Although first mentioned in July, the finalisation of these decisions is unlikely to take shape until next year. With Covid19 insecurities as to whether the UK will or won’t end up under more restrictive measures in the near future, it becomes unfair on the consumer to increase the cost of online shopping when it has become so essential for many households to remain safe. 


How will this change traditional retailers?


Non-essential shops were shut on and off for periods over a year including one stint that lasted three months. Although government initiatives were put in place to help those owners, employees and service providers involved, the pandemic dramatically changed the way people consumed for what has emerged greater than that foreseeable future. With on and off lockdowns, an increased wariness for people to return to traditionally crowded places and more consumers showing preference to shopping online, people returning to the high-street has been unpredictable and this erratic movement has been detrimental to the planning and future of these physical businesses. An online sales tax would increase the cost of shopping online and make the high-street become appealing because of its lower cost. Shopping online would come at a greater cost for its convenience. 


Where did this idea come from?


When Phillip Hammond was Chancellor of the Exchequer from 2016 to 2019, he mentioned the idea of a digital sales levy. Hammond calculated and suggested that a 2% online sales tax would generate approximately £2bn a year. 


Did the Covid19 pandemic make a difference?


Before Covid19, business rates generated £25bn a year for the Treasury. With concerns over having to reduce business rates for the survival of the high street and already minor changes being implemented into the most recent Budget, the Treasury need to raise the footfall to get the value back to before Covid19 levels. As business rates are currently calculated on property values from 2015, the violent decline had a major impact. Without Covid19’s rapid and harsh intervention of normal trading, business rates would not need a reform as large as required right now and the government wouldn’t be searching to recoup this large loss. 


What does this mean for consumers?


“If there's a sale of £100, but 2%'s levied on top, most businesses will want to pass that on to the customer base. It will likely lead to an increase in the cost of goods purchased online,” says Tom. “Except for VAT, most taxation usually occurs after something has happened, and is taken out of the profit – you don’t usually see it at the customer end.”


 Tom Kivlehan, BDO 


It is likely that the consumer will have to absorb this extra cost that an online sales tax would bring. This would encourage consumers to return to the high street for more affordable prices. With the online market being so profitable over the pandemic and up until the latest budget, the success has made it a suggestable and sustainable way to bring revenue back into sources that have lost out. 


Overall, the Covid19 pandemic pushed consumers to shop online. The high street has suffered and to regain these losses whilst encouraging people to return, a tax that consumers would have to pay for, increases the price of shopping online. With the small changes in the 2021 Budget to help those paying large business rates and an online sales tax, consumers are being encouraged to return to the high street. Nothing has been announced as to if this will come into effect, but it is estimated that this will be revealed in more detail in the spring. 

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