Can an online sales tax rebalance the high street?

Nabila Ahmed looks at the discussions bubbling up around an online sales tax.

Ethical Consumer's campaign for increasing tax on big tech companies during the pandemic was disappointed, but not surprised, as our call for an increase in the current 2% Digital Services Tax didn't appear in the March 3rd budget announcements. In addition, nurses in England only got a meagre 1% pay rise. A Digital Services Tax, temporarily set at 10%, would have raised enough for a 3% rise on its own.

March budget disappointment and surprises

However, the budget did contain a few surprises, such as a widely supported increase in corporation tax from the current 19% to 25%. This increase is expected to raise an additional £22bn a year with the tax raised increasing from £48.8bn in 2022-23 to £71.3bn in 2023-24. Less encouraging was the Chancellor's announcement of £25bn of unprecedented 'super-deduction capital allowance tax reliefs' for big UK businesses.

A new idea – an Online Sales Tax

In the run-up to the budget, a new idea for an Online Sales Tax had been gaining some high profile supporters.  So, what is this all about?

Repeated lockdowns during this Covid-19 pandemic have hit the retail sector the hardest, with thousands of shops closing amidst a boom in online sales. Once things do open up again, the high street looks set to be very different. Ministers, USDAW (the shop workers union) and even big retailers such as Tesco have called for an online sales tax, as a way to readdress the balance between physical, bricks and mortar shops and online retailers. There has even been speculation that the online sales tax could be a way of reforming the business rates system.

The proposed Online Sales Tax would be a flat tax that would be applied to all online sales, for example, a 1% levy on online delivery items or a 2% tax on sales made online. USDAW have calculated such a tax would raise around £1.5 billion, which could fund a cut in retail business rates of around 20%. They went on to say that a 2% Online Sales Tax could fund a reduction in business rates from the current 51% to 35%, which is the rate that was last seen in 1990.

There was some expectation that the Chancellor would make an additional announcement on March 23 about this tax, but it did not appear. Some sources suggest its announcement may appear in the Autumn budget (paywall).

Will the tax help address tax avoidance at Big Tech?

Ethical Consumer's campaign for taxes in this area is based on our concern for the social and economic effects of systemic avoidance at big tech companies, and especially at Amazon.

An Online Sales Tax is a good way of making Amazon's activities taxable in a way it can't avoid, and Ethical Consumer explored this idea in December last year. And while the version proposed by USDAW and Tesco will address some of the unfair competition that high-street shops are facing, if it is spent solely on reducing business rates accordingly, there will be no boost to government revenue at a time when more money is needed for spending on other things too.

If such a tax appears, it will also be interesting to see whether small online businesses and start-ups are also affected. The attractive thing about the Digital Services Tax was that it only applied to companies with a global turnover of more than £500 million. A high threshold for an Online Sales Tax would be good too.

It's also worth pointing out that sales taxes are the most regressive form of taxation. They fall heaviest on poorer people. Whilst an Online Sales Tax can argue that it is just moving around a tax that people are already paying (in high street prices), it shows that a better solution to addressing the tax avoidance of Amazon will be to get a decent international agreement at the OECD, and soon.

What can you do?

If you would like to follow our Covid-19 Tech Tax Campaign, please follow us on our social media channels (TwitterFacebookInstagram) and read our article on the next steps of our Tech Tax campaign.