UK online sales tax: What could it mean for businesses?

Recent reports suggest an online sales tax could soon be introduced in the UK to help HM Treasury increase revenue as it seeks to balance the books following a period of record-breaking borrowing.

What is the online sales tax?

Initial reports indicate the online sales tax will be imposed at a rate of 2% and will be charged on all goods sold online, while there will also be a mandatory charge on customer deliveries.

The online sales tax will be based entirely on a company’s turnover – rather than profit – from web-based sales.

It forms part of a wider project being undertaken by the Treasury to redress the balance between taxation on physical shops and web stores. Chancellor Rishi Sunak is believed to be supportive and an announcement could come this year.

Will businesses still have to pay digital services tax?

Yes. The digital services tax (also charged at 2%) introduced in April 2020 relates to all revenue derived from digital platforms, such as social media and search engines. This is likely to continue to apply alongside the new online sales tax.

What is the likely impact?

It is widely expected that most online retailers would pass on the 2% levy to customers in the shape of price increases.

Why is the Treasury planning this?

With the UK approaching a year since lockdown was first imposed in March 2020, the shift from bricks-and-mortar stores to online shopping has accelerated. Non-food online retail made up 46% of all web commerce in 2020; up from 31% the previous year.

As high street retailers struggle, the government needs to generate tax revenue by imposing duties on those areas that are booming. There is speculation that food delivery platforms and supermarkets could be next in line for a new tax.

Are there any potential problems?

The digital services tax provides a useful insight into the likely challenges of any new online sales tax. These include:

  • The risk of avoidance. How will the UK ensure all retailers, particularly those based overseas, comply?
  • If retailers opt to pass on the tax to consumers, it effectively becomes an additional VAT and could dampen enthusiasm for spending.
  • Where would ‘click and collect’ services sit between physical and online sales and would they be taxed?

Could there be an alternative?

One mooted alternative is a delivery tax on all orders. This would have the added bonus of driving down traffic and pollution.

What should businesses do?

For now, online retailers must wait to see whether the UK confirms the introduction of online sales tax and, if so, the precise terms it sets out.

As with the arrival of any new tax – or even more frequent occurrences such as rate changes, regulatory updates and amendments to exempt goods and services – business leaders should always be striving to ensure their tax infrastructure is as robust as possible while retaining the flexibility to immediately comply with new rulings.

Our automated tax determination and reporting solution does exactly that. Interested in finding out how it would work for a UK-wide online sales tax? Contact us today.

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