21 June 2022

Regressive, ineffective and unnecessary – an online sales tax is no way to help the high street

By Elizabeth Dunkley

There’s no denying that the rise of online shopping has changed retail forever. Just how many times have you clicked ‘check-out’ to buy something in the last few months? Now compare that to a decade ago, or even just a few years ago. 

Internet sales as a total percentage of sales in the UK have rocketed from 2.8% in 2006 to 18.9% in 2020 – and then shot up again to over 30% in 2020, turbocharged by the pandemic. 

While online retail flourished, repeated and prolonged lockdowns were devastating for the high street. Between March 2020 and April 2021, 190,000 jobs were lost in retail, while 8,700 chain stores closed in the first six months of 2021 alone. 

In response, an increasingly vocal body of opinion has argued that this is not just an unfortunate development, but an unfair one. The argument is that the rise of online retail has not been driven by any inherent superiority in its business model – or at least not just by that – but by a business tax regime that actively discriminates against bricks-and-mortar traders. Set up a shop on a high street, and you will be taxed to the hilt. Trade online from a sprawling warehouse on the town’s outskirts, and the burden will be significantly reduced.  

That debate has prompted the Government to consult on the merits of an online sales tax (OST). Dubbed the ‘Amazon Tax’ in the media, proponents argue it could be used as a means to level the playing field between online and in-store retail. 

The case for such a tax is superficially attractive. We all know how important high streets are, and why we need to protect them, but it does not take more than a cursory analysis for the case for an OST to crumble.

For starters, the idea that taxing online retail would send shoppers flocking back to their local high street doesn’t hold much water. There are plenty of reasons people to choose to shop online aside from price, such as choice, convenience, and the availability of stock. 

Moreover, there isn’t a clean divide between ‘high street’ and online: much of the UK’s retail sector is ‘hybrid’, with the same businesses serving customers both online and in-store. In other words, lost high street businesses also depend on their online presence: research conducted by Visa last year showed that 87% of small high street businesses consider an online presence paramount to their commercial success.

The point here is that it really doesn’t make much sense to think of online retail as some specific, separate part of the economy. Many of the retailers that would be hit by an OST are high street retailers too. It would be regressive and unconservative for the government to punish innovative businesses that adjust their models in a way that reduces their costs and provides a service in a way that consumers prefer. 

Indeed, rather than challenging the dominance of the large multinationals, such taxes may in fact end up giving Amazon and other large online retailers a competitive advantage at the expense of their SME competitors. 

Even more importantly, even if an OST is designed to be levied on vendor, the burden will fall primarily on consumers, hitting the poorest and most vulnerable hardest. As we lay out in our latest Centre for Policy Studies report, the imposition of a new tax could cost an ordinary household as much as £175 a year – and that is before we even begin to talk about inflation.

And the political case does not stack up any more than the economic one. Just 29% of the public support an OST. Every UK region (with the exception of London) is against the idea, with only the highest earners being in favour of it. 

Given the government’s stated raison d’être is to level up the country, it does not take a genius to realise that a policy that only enjoys net support among wealthy Londoners will go down like the proverbial cup of cold sick. 

Nonetheless, supporters of an OST are right in one respect: the current business tax regime is deeply flawed. 

For years, high street retailers have highlighted the extortionate cost of business rates as a barrier to doing business – particularly as they are based on the value of the property a business operates in, rather than the profitability of the business. If the Government wants to help the high street, it should begin with a fundamental reform of the business rates system.

There are other policies that government, especially local government, can adopt to improve town centres, such as encouraging commercial-to-residential conversions, tackling empty storefronts, and encouraging consolidated ownership – or at least joined-up thinking – on high streets across the country. 

And sometimes, it is the simplest of things that can make the biggest difference. When the public was asked about specific measures that would help their local high street, lowering parking charges and increasing parking availability came second to a cut in business rates.

The Government is right to want to help our bricks-and-mortar traders. But an OST is no way to help the high street. Neither the economic nor political arguments in favour of it stand up to scrutiny. And rather than fixing past policy mistakes, the Government may be on track to make a new one. It is the wrong tax, at the wrong time and will do nothing but hurt consumers and businesses alike.

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Elizabeth Dunkley is a researcher at the Centre for Policy Studies.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.