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Tax experts have urged the UK government not to impose an online sales tax because it would hurt businesses more, particularly at a time when the nation is experiencing a crisis related to the cost of living.
With the current cost-of-living crisis and inflation, "this is a particularly difficult time to be considering an online sales tax with the current cost-of-living crisis and inflation," says Aneeta Samra, director at tax consulting firm Alvarez & Marsal Taxand UK in London.
The calls come in response to a research report published on June 21 by the London-based think tank Centre of Policy Studies (CPS), which concluded that the tax would be "unfair, inefficient, overly complex and widely unpopular."
The OST would increase the cost for businesses that sell online, according to Tom Clougherty, head of tax at the CPS.
Clougherty opined that this would "help undermine the government’s broader efforts to level up and boost economic growth."
The outcome of a three-month consultation on whether to enact the sales tax is being evaluated by the UK government. It has stated that the purpose of enacting such a tax is to support brick-and-mortar businesses and catch up to online retailers.
During the pandemic, many of these retailers achieved record sales. Samra disputes the idea that they made excessive profits, though.
According to Samra, "there is little evidence that large online retailers are making unreasonable profits compared to brick and mortar stores."
A 1% online tax would generate about £1 billion ($1.2 billion) annually and aid in lowering businesses rates, which are property-based taxes for high street businesses. According to estimates, business taxes bring in £31.7 billion annually for the UK Treasury.
The UK government has proposed imposing an OST rate of either 1% or 2% on the total sales of online merchants. The goal is to level the playing field between high street businesses and online retailers.
The CPS stated in its report that "any plausible version of the OST would be difficult to design, costly to implement, and the source of serious economic distortions – as well as being a very inefficient way to raise additional revenue."
The CPS contends that even if the tax were directed at major online retailers, small businesses and consumers would still bear the majority of the burden for the charge, also known as "the Amazon tax."
According to the report, "An OST would have to significantly increase online prices relative to in-store ones to make a meaningful difference to the fortunes of traditional retail"
There are dangers connected with introducing an OST, according to Nina Harlamovs, senior director at Alvarez & Marsal Taxand UK in London.
According to Harlamovs, "the main risk for businesses is an inability to comply, whether this is because of the complexity of the tax or the poor accounting systems."
"Managing compliance requirements in jurisdictions other than where a company is established will also be a big challenge," she continues.
Businesses must also make sure that indirect tax compliance tasks are given sufficient funding and priority.
A variety of actions can be taken by businesses to incorporate the impact of an OST into their compliance systems. Companies, however, should only require one measure.
Samra and Harlamovs both recommend that companies think about the pricing on their websites, the way sales are reported, and adjustments to their back-office accounting systems.
On how the government proposes to implement an OST, whether it would be a flat rate or if exemptions would be applicable, the level of specific changes to internal systems would also depend.
"Some of the internal requirements are not driven by tax compliance and, in our experience, businesses need to work collaboratively to ensure their systems and processes can adapt to the ever-changing tax landscape and digitalisation," says Samra.
The CPS acknowledged the need for support for offline businesses, but instead of proposing an OST, it suggested a fundamental overhaul of the business rates system. Not too long ago, this was on the political agenda.
The Conservative Party pledged to lower business rates through significant tax system reform in its 2019 election platform. Instead, in order to increase revenue in the wake of COVID-19, the Conservative government has outlined plans to raise corporation tax from 19 percent to 25 percent.
Business rates, according to the CPS, should be based on the underlying land value and subject to yearly reevaluations. Rates for companies nationwide would decrease as a result.
The report also suggests sourcing additional funds from tax increases on other items and separating business rate increases from inflation.
The report states that "the case for an online sales tax does not stack up. It would punish innovation, undermine competition, and generate significant deadweight losses at a time when economic growth should be a primary concern."
A global supply chain crisis that has been exacerbated by Brexit and the conflict in Ukraine is having an effect on the UK economy. The Bank of England has issued a warning that the inflation rate, which has reached a 40-year high of 9.1 percent, could rise to 11 percent within a short period of time due to rising food and fuel prices internationally.
Some tax experts contend that now would not be the best time to raise taxes because doing so would cause retailers to pass the cost on to customers and exacerbate the cost-of-living crisis.
By fLEXI tEAM