10 March 2020

An online sales tax would be retail self-harm

By Andrew Busby

As online sales continue to grow, more and more retailers are voicing their concern over the trading advantage enjoyed by giants such as Amazon, Asos and Boohoo.

Traditional retailers complain loudly that their competitors unfairly undercut the high street because business rates on out-of-town warehouses are far lower than those in town centres.

One of the most contentious remedies to this apparent injustice is the idea of an online sales tax. But is this really a viable way forward?

Among those in favour is Tesco chief executive Dave Lewis, who has long called for its introduction and lobbied for support from other retailers – notably the Co-op, which has publicly backed the idea. He proposed reducing business rates by 20% and introducing a 2% tax on all online sales.

Writing in the Daily Mail last year, Mr Lewis said: “Billions of pounds have shifted online, but the rates system was never devised to account for this. Because the bill is linked to property, not profit, shops struggling to keep the doors open have to pay up, while larger online businesses pay just a fraction.”

And he’s far from alone. Brands joining the chorus of condemnation include high street stalwarts like M&S, Shoe Zone, Beales and Laura Ashley.

Lewis correctly notes that while our business rates system has “barely evolved” since when it was devised in 1988, changes in the way people shop have led to exponential growth in online sales, while many traditional retailers move in the opposite direction.

At this point it’s worth remembering just how recent a phenomenon this is.  It wasn’t until 1994 that Amazon first saw the light of day and another 13 years until the first iPhone was launched – both innovations now drive a huge amount of online sales and are integral to many of our lives.

There’s no doubt about the discrepancy between what the online giants pay and their high street counterparts. Last year in written evidence to a parliamentary enquiry, Amazon confirmed that it paid just £63 million in business rates in Britain, on sales of £8.8 billion. According to This Is Money, that’s less than the combined total for just seven individual shops, including John Lewis and M&S, in London’s West End.

But part of the reason those tax bills are so low is because of the way these companies have structured their business. Is it right to penalise those who have made the system work to their advantage? It’s a bit like saying to Liverpool, “You’re only allowed to field ten players next season, just so we can level things up a bit.”

Another big issue with taxing online retailers is sales attribution and consumer behaviour. In today’s retail environment, shoppers don’t think in terms of online and offline, it’s all just shopping. So that wide-screen TV could have just as easily been bought online or in-store. But if online, was it because we had the ability to view it in store, or in store because we were able to do our research online? In other words, how does one calculate the sales attribution for any individual purchase, and therefore correctly apply tax?

In their 2019 report ‘The impact of business rates on business’, the Treasury Select Committee concluded: “Businesses deserve a system that reacts to changes in the modern economy. A number of alternatives to the current business rates system were presented, and an equal number of reasons presented as to why England and Wales are not yet ready to move to them. One of the key reasons is that there is insufficient modelling of the viable alternatives, and therefore insufficient data to make a recommendation for change currently. This is true of the online sales levy.”

While acknowledging that change is needed, this seems a long-winded way to say, “We don’t know what to do yet”. What is certain is that the creation of a level playing field on which all retail businesses can compete is the best way forward. With this in mind, the Committee considered a ‘hybrid tax’ which would combine elements of the current system, a tax on sales and revenue and a tax on profits. This, the MPs said, would be “more reactive to changes in the modern economy”. Again, it sounds nice enough but leaves open the question of what such a tax would look like in real terms.

The danger of an online sales tax is that it would stymie sales in general. Very few retailers rely solely on high street walk-ins and physical sales. Indeed, most high street chains only exist because they are able to sell online as well as off. Looking at this problem as a dichotomy of online vs offline threatens to clumsily punish all retailers for diversifying their sales tactics in an increasingly competitive market.

Perhaps the real question should be ‘how do we design a tax rates system that keeps a level playing field and allows smaller players to compete with retail giants taking advantage of low-rate warehouse spaces?’.

Hopefully, that’s what this ‘hybrid tax’ can achieve but there will be nuances to iron out and sliding scales of economy to incorporate before we have something that even begins to feels considerate to both sides. One possibility might be special consideration for the ‘culture’ of a high street when it comes to rates to keep the integrity of the area’s retail. It could also offer tax breaks and partnerships for companies in smaller high street units that are unsuitable for behemoths such as Amazon.

Whether the committee’s recommendations ever see the light of day again, or are destined to life in a forgotten corner in Westminster, Budget Day is certainly shaping up to be a watershed moment for British retail – and possibly not in a good way.

Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.

CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.

Andrew Busby is a retail writer and the founder of Retail Reflections