Online sales tax: Assessing an option to help rebalance taxation of the retail sector

The LGA supports the introduction of an online sales tax, particularly as it would help to spread the range of the taxbase for business taxes. However; this should not be at the expense of business rates income.


May 2022

  • The Local Government Association (LGA) is here to support, promote and improve local government. We will fight local government's corner and support councils through challenging times by making the case for greater devolution, helping councils tackle their challenges and assisting them to deliver better value for money services.
  • This response has been agreed by Lead Members of the LGA Resources Board.

Introduction

  • The LGA supports the introduction of an online sales tax, particularly as it would help to spread the range of the taxbase for business taxes. However; this should not be at the expense of business rates income. As we said in our submission to the Business Rates Review Call for Evidence; while an online sales tax would not replace business rates, it could still provide a sustainable and meaningful revenue source for vital public services. We went on to say that 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.
  • We noted that the LGA had commissioned work on an e-commerce levy from WPI Economics and said that we would support consideration of the options set out in the report, which could be a local e-commerce levy along the lines recommended in this report or VAT (Section 3). Although there would be risks that it would put up the cost of doing business online, if it was introduced at a relatively low level, this could be a low risk.
  • We therefore welcome the fact that the Government is undertaking a more detailed consultation on the scope, design and impacts of a centrally levied online sales tax. We note that the consultation does not discuss the mechanics of how it would affect the business rates system other than the statement that revenues could be applied to business rates reductions through reliefs for retailers with properties in England. If councils were to be required to administer the tax, we would expect set up and administration costs to be considered.
  • Given the funding shortfall faced by councils, which in 2021 we calculated as £1.1 billion in 2024/25 (Autumn Budget and Spending Review 2021: LGA On-the-Day Briefing) and which we would expect to grow given the current environment of rapidly rising costs, we would argue for the online sales tax to be a source of additional income for councils and not just a like for like substitution for business rates. 
  • If the government does decide to direct revenues from the tax to businesses, we would like to see a wider conversation; councils should have the discretion on how to allocate funds from the tax; this could be in the form of business rates relief or it could be local priorities, such as regenerating high streets which might have more of an impact locally than business rates relief. A possible model could be that used for Additional Restrictions Grant where councils had discretion to spend grant money on helping local businesses or on wider business support activities.
  • We note that the present consultation is very detailed and we have grouped our replies as set out in the consultation document.

Chapter two: scope

Question 1: Would you favour a tax for all ‘remote’ sales or just a subset of ‘online’ sales?

Question 2: How should taxable sales be defined and what would the practical implications be?

Question 3: Are there transactions that would be particularly difficult to classify as either online or remote? What are these, and how should these be addressed?

  • As stated above, in our response to the Business Rates Review Call for Evidence we supported a tax on online rather than all remote sales saying that 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 the possibility to move between different modes, it would seem sensible to include sales using a mobile phone to access the internet, text, and social media, although, as noted in the reply to questions 26 to 29 some small businesses may be below the threshold for the tax. In defining the tax, we consider that the key consideration should be whether an online sale to a consumer replaces a physical one carried out from premises which would be liable to business rates.

Question 4: Should click and collect be exempted? If so, how?

  • To the extent that click and collect may involve the use of rateable premises (either from a branch of the shop supplying the good or from locations such as lockers which may be separately rateable), there is a case for it to be exempt although there is a wider question about ‘last mile’ logistics and home deliveries, we note the Government 2020 position statement on this and consider that any government policy should be consistent. It is also arguable that there is a distinction to be drawn between click and collect from a branch of the selling business and those from delivery stations.

Question 5: Should an OST be applied to all goods? Are any exemptions necessary? If so, what are these and why?

Question 6: How would a goods-only approach apply to takeaway food?

Question 7: Do you think that digital products should be included in an OST? How should a “digital product” be defined?

Question 8: How can the risk of value shifting from goods to services be reduced, for an OST that has services out of scope?

Question 9: Are there other ways you could foresee OST being avoided? How could this be defended against?

Question 10: Do you think some or all categories of services listed above (including any digital services) should be included in the scope of an OST? Would you add any additional services?

Question 11: To what extent do businesses currently distinguish between their sales of goods and services in business systems? On what basis do they currently make this distinction?

  • If online sales replace physical ones, it would follow that an online sales tax should apply to both goods and to those services which could be delivered online or in person, for example online travel agencies or financial services and not to bookings of personal services which will be delivered in person in rateable premises. Applying the tax to both goods and services would also reduce the risk of value shifting.
  • We would argue that public services such as schools, the NHS or local government should not be subject to the tax; this would be in line with the VAT rules where most of the activities of government departments and local government are outside the scope of VAT, either because they are not carried out by way of business or are outside the scope of VAT as they are statutory in nature.
  • On avoidance, we suggest that the rules should be made clear from the start, and be designed to minimise avoidance, and there should be a clear electronic compliance trail to deter avoidance.
  • Goods and services should be within the scope of an OST if they can be seen to be substituting sales in direct competition with those carried out through physical retail premises.

Question 12: Do you agree that an OST should be designed to exclude B2B sales?

Question 13: Do you agree that an approach of removing all B2B transactions from scope would be preferable to applying the tax according to the individual transactions (e.g. according to the use of the item sold)?

Question 14: What is your preference from the above or any alternative approaches to exclude B2B sales from an OST while limiting administrative burdens on business?

Question 15: How do you think a business should be defined for the purposes of an OST?

Question 16: Are there other types of entities or transaction types which should be out of scope of an OST e.g. online sales by charities, public bodies or consumer to consumer transactions?

  • We would see the tax primarily designed to tax consumer rather than business transactions so would support excluding business to business transactions and that this would be preferable to excluding individual transactions.
  • As for defining a business liable to tax, one idea would be to use the VAT rules. We have stated above that we think that government and local government activities should be exempt.

Chapter Three: Design

Question 17: Do you agree that an OST would be levied on vendors?

  • We consider that the logic of a sales tax is that it should be levied on vendors.

Question 18: How should different intermediaries that sell online on behalf of other businesses be treated with respect to an OST i.e. online marketplaces, franchises, auctioneers, agents and commissionaires?

Question 19: Are there situations in which it is not possible to distinguish the vendor from the intermediary, or in which the intermediary plays a crucial role in the sale? How should these be treated?

Question 20: Are there circumstances in which it would be appropriate for an intermediary to be liable for an OST, rather than the underlying seller? What are these?

Question 21: How would an OST define UK customers?

  • The consultation document suggests that it should be possible to tell these by UK delivery addresses; this seems sensible.

Question 22: Should UK-based intermediaries play a role in identifying taxable transactions or be made liable in some cases?

  • The consultation suggests that one way to mitigate the difficulty for overseas businesses could be to involve intermediaries such as marketplaces or platforms, as discussed above.

Question 23: Would either a revenue or a flat fee approach have a greater distortive impact on consumer behaviour? What are the scope and design considerations that would lead to distortion caused by both models?

Question 24: Would either approach be particularly preferable? If so, why? Are there any preferences around scope (i.e. different exclusions or exemptions) which would make one of the approaches more preferable?

Question 25: Do you have experience to share of overseas' taxes on online sales using either model, or similar approaches not covered above?

  • As we said in our reply to the business rates call for evidence, we consider that if it was introduced at a relatively low level that this would be a low risk of a having a distortive effect on consumer behaviour. We would see a revenue as opposed to a flat fee approach as less regressive, this was the approach modelled by WPI Economics in its work for the LGA referred to above.
  • The Indian equalisation levy would appear to be a model from overseas, particularly their definition of e-commerce as:
    • (i) online sale of goods owned by the e-commerce operator; or
    • (ii) online provision of services provided by the e-commerce operator; or
    • (iii) online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
    • (iv) any combination of activities listed in clause (i), (ii) or clause (iii);
  • However, there are some ways in which the proposed OST would differ from the Indian equalisation levy, for example the latter is only levied on foreign e-commerce companies.

Question 26: What factors should be taken into consideration in setting an allowance? How would this differ for revenue and flat-fee models of an OST?

Question 27: What would be a reasonable OST threshold and allowance to set in order to protect small businesses while also making sure the OST generates sufficient tax revenues?

Question 28: Do you agree that an OST threshold or allowance should apply once to all businesses under common control?

Question 29: Do you agree the threshold or allowance would apply to individual businesses when they operate franchises or sell through online marketplaces?

  • We note that the consultation suggests a threshold of £1-2 million of taxable sales or additionally a number of online orders. According to the ONS E-commerce and ICT activity, 2019: (published 5 February 2021) firms of over 10 employees account for over 96 per cent of total e-commerce sales so that might be seen as a suitable threshold. An alternative (and in most cases lower) threshold would be to consider using a VAT threshold. Businesses should not be allowed to divide themselves up into smaller units to be below the tax threshold.

Question 30: Do you consider there to be strong arguments either for or against quarterly or annual reporting? If this hinges on any of the design options laid out in this consultation, please specify which options and why.

Question 31: Can you provide insight into the overall burden to administer all systems and processes required to support an OST? Do systems currently allow you to identify the features listed above; if so, please provide further details on how this distinction can be made.

  • Businesses are best placed to answer these questions, but we note that the consultation suggests that the preferred option would be in line with VAT where it is quarterly for most businesses.

Chapter Four: Impacts

Question 32: On balance, what would the impact be of an OST with business rates reductions on the scale described above, including on retailers that operate both online and offline?

Question 33: Do the potential revenues from such a tax justify the additional administration that it would require of businesses, as well as the design complexities detailed in the previous sections?

  • The consultation gives different options for business rates reductions – either overall or targeted on the basis of a tax raising an annual revenue of £1 billion. The consultation does not discuss what the mechanism for such business rates reductions would be. We note that the consultation does not discuss the mechanics of how it would affect the business rates system other than the statement that revenues could be applied to business rates reductions through reliefs for retailers with properties in England. If councils were to be required to administer the tax, we would expect set up and administration costs to be considered.
  • Given the funding shortfall faced by councils referred to in paragraph 6 above we would argue for the online sales tax to be a source of additional income for councils and not just a like for like substitution for business rates.
  • If the government does decide to direct revenues from the tax to businesses, we would like to see a wider conversation; councils should have the discretion on how to allocate funds from the tax; this could be in the form of business rates relief or it could be local priorities, such as regenerating high streets which might have more of an impact locally than business rates relief. A possible model could be the Additional Restrictions Grant where councils had discretion to spend grant money on helping local businesses or on wider business support activities.
  • All taxes involve a certain amount of administration and compliance expenditure but despite this we do think that on balance we would support the introduction of an online sales tax.

Question 34: To what extend do you think an OST would impact innovation, efficiency and productivity?

Question 35: To what extend do you believe that an OST would impact consumers’ behaviour in favour of in-store retail?

Question 36: How do you expect online retail to evolve in the coming decade and how should an OST take account of these?

  • We would not expect a small levy to have much effect on innovation efficiency and productivity, particularly if the levy is absorbed by the business as opposed to being passed onto consumers.
  • The WPI Economics work commissioned by the LGA modelled ONS data on the value of website sales to private customers, produced by the Office for National Statistics (ONS). WPI’s central scenario was that if these website sales grew by around 10.5 per cent a year (the average annual growth rate) they would reach almost £300 billion a year in 2024/25. A revenues based tax would therefore be buoyant.

Question 37: What is the evidence for the degree of pass-through of the cost of an OST to consumers? To what extent will this vary depending on the type and value of the goods sold?

Question 38: Do you have any data which would support the Government in making an assessment of the incidence of the tax or its distributional impacts?

Question 39: In your assessment, what would be the distributional impact of an OST? Are there particular groups who are likely to be worse affected than others? How would this change if an OST were applied as a flat-fee per transaction (or some other similar metric) versus a percentage of firms’ revenue from online sales?

Question 40: What environmental impact might an OST have? How would its design affect an OST’s environmental impact?

  • We do not have data to hand to answer these questions in detail. As already suggested, we can see the logic that a percentage tax would be less regressive than a flat fee.

Contact

Mike Heiser, Senior Policy Adviser

Email: mike.heiser@local.gov.uk