How might the proposed UK online sales tax affect businesses?
Read time: 8 mins
With the government proposing a 2% levy on goods bought online and a new tax on deliveries, sales tax might be undergoing a significant change. We spoke to Tom Kivlehan, Indirect Tax and International Partner, and Chris Evans, Indirect Tax Manager, from BDO to find out more.
In July, news broke of the government’s potential implementation of a new 2% sales tax, that may be levied at online businesses, or as a potential new tax on consumer deliveries. The aim of the tax would be to raise around £2 billion annually, which would help to alleviate some of the costs of the fallout from COVID-19. Not only that, there are hopes it could level the competitive playing field for the high street in comparison to e-commerce sites such as Amazon. This new tax would run alongside the present digital sales tax (DST).
The tax itself has yet to be confirmed, but its potential introduction has left smaller digital firms wondering how to adequately prepare. With their experience of handling similar taxes in other jurisdictions, we asked Tom and Chris from BDO’s Indirect Tax team to elaborate on how the tax might affect companies, if implemented.
How likely is this tax to be implemented?
At present, the tax has not been officially announced by the Government, with internal discussions ongoing in advance on the Autumn Budget. Even if it were to be implemented, there is the chance that some businesses may not be caught by the tax.
“Once we’ve got more granular detail, there are likely to be exceptions and exemptions,” says Tom. “I suspect there will be a lot of looking at the fine details and figuring out if businesses are actually impacted.”
Chris believes that the tax will be some time in the making, if it does come to fruition. “There will likely be a long process of policy-making, with months or even years of evaluating precisely which businesses will be affected by the new rules.
“That being said, it’s worth keeping an eye on the progress, as companies who think they’re on top of things related to the proposals when it is announced, might find that the end result is quite different to what’s been put forward.”
How would this tax differ from other levies made recently, such as the sugar tax, for example?
Given that the new sales tax may effectively be based on turnover, there might be a significant change on the customer end of transactions. “If there's a sale of £100, but 2%'s levied on top, most businesses will want to pass that on to the customer base. It will likely lead to an increase in the cost of goods purchased online,” says Tom. “Except for VAT, most taxation usually occurs after something has happened, and is taken out of the profit – you don’t usually see it at the customer end.”
This makes the new levy unusual, says Chris. “The last time the effect of a tax was directly seen at a consumer level was the introduction of the insurance premium tax – even the sugar tax has been levied at the manufacturing end.” Though the sugar tax was levied on the manufacturer, in practice it was passed through the supply chain to the consumer which ended in retailers increasing the price of certain soft drinks. If a new tax is aimed directly at the retail sale, an increase in consumer costs is even more likely.
“What we are seeing with Amazon with the enacted Digital Sales Tax, and likely other businesses, is that they’ve declared that the whole tax will be passed onto their marketplace – not the consumer directly, but enough of a similarity that it should be noted,” adds Tom.
On a practical level, what would the introduction of this new levy mean for businesses operating online?
Chris believes that the main fallout of the new tax will be on those businesses that haven’t got the necessary infrastructure for implementation.
“As an example, most businesses can understand VAT, to an extent, and operate their systems and processes accordingly, having adjusted their pricing structures to fit that need,” he explains. “Larger businesses that have familiarity with working cross-border with different VAT rates and other levies already have online systems set up. However, smaller businesses that aren’t international might feel the brunt of this on a practical level.”
The imposition of a new, additional tax likely means businesses will need to update their IT systems, payment processing and their pricing structure, having not previously planned to for the next few years. “They may not have the necessary functionality to charge and account for both a VAT element and the additional online sales tax element in place,” Chris explains, “and that is likely to be costly. Not only that, but other nations might look at this tax – if successfully implemented – and start doing the same thing, requiring further adaptation.”
“The customer front end will be the most critical part that will need to be updated to accommodate the new tax.. On the back end, a new tax engine will be needed to calculate the figures, and form them into returns. It’s a lot to consider.”
Will this affect smaller and larger players differently?
Tom’s view is that on a commercial level any tax that targets delivery fees will favour larger businesses, because they are already reducing – or in some cases eliminating – their delivery charges in a way that smaller businesses cannot. “You can see that larger elements of the marketplace are already doing away with delivery charges, and clients and customers already feel as though it’s relatively neutral in cost terms,” he explains. “Smaller businesses with a minimal online presence can’t do the same, as it’s uneconomic, and will have to retain their delivery charge and add the additional tax.”
Chris agrees. “I think this tax is one that might disproportionately affect smaller businesses, because they can't do much with their margins, and they don't have the sort of internal capacity and resources to deal with a new tax as efficiently as their larger competitors.
"A key element of design for the Government should be how ensure the tax does not advantage the large players in the market by creating substantial compliance costs that small companies will be less able to bear."
Will this tax affect tech businesses specifically?
Tom doesn’t think tech businesses as a sector will be hugely impacted, given that the aim of the tax is to level the playing field between brick and mortar stores and digital retailers. “For streaming services or software providers, there’s no high street equivalent to compete against,” he says. “However, if the tax makes Amazon more expensive, the high street directly benefits. It will only really affect tech businesses focused on retail and the delivery of goods.”
When could we expect this tax to be implemented?
The timing for the new tax is still up in the air, but given its novelty and complexity, it is likely to take some time to implement. “Additionally, you’ve got the added issue of COVID-19’s effect on current economic activity,” says Chris. “It seems unlikely that the government will push forward with an attempt to make the online economy more expensive when COVID-19 has made online shopping a necessity for many.”
What will businesses want from this government if this tax is applied?
Tom thinks that other than guidance, businesses will want to know if there is a level playing field for those affected. “A tax authority’s ability to enforce a tax is normally limited to those in their jurisdiction,” he elaborates. “If there’s a UK company in question, then clearly the authority can go to their premises to make assessments and take action if needed. But if it’s a company based elsewhere, then the ability to enforce these taxes can be quite difficult.
“The established and reputable retail community online is going to want to be certain that when this tax is put in place, there will be enforcement procedures around it.” The lack of assurances might lead to businesses migrating out of the UK, he suggests.
However, there will likely not be an immediate departure of businesses from the UK if the new rules are implemented. Chris says: “Even with the fallout from this year’s events, the UK has a big economy that is very profitable for retailers with the right proposition; there’s a lot of wealth in the country for retail transactions. I don't necessarily see a proposed tax as being a disincentive to get into the online market, or to continue being in the market, especially when considering the wider economic climate that COVID-19 has created.”
“Additionally, the UK’s movement towards creating taxes to apply to online activity is one that you would expect to occur globally, as other countries face the same policy problems as the UK”.
Having advised businesses already operating with this tax or similar, what advice can you give businesses that will be affected?
Tom’s advice is to act quickly and early. “Most of our work involves helping businesses recover when they haven’t realised that a tax was either coming in or already in play. As we work in the international environment, often companies aren’t aware that when they’re expanding abroad that there are new taxes to consider, such as VAT or associated taxes on their turnover.
The expense of sorting out these issues is “painful”, says Tom, as they are quite difficult to resolve. “Many companies don’t collect the right data, or don’t collect it for enough time – tax authorities can commonly go back at least four years.”
Although it’s unlikely this tax will be backdated, Tom’s experience shows that it pays to be proactive. “If your business is potentially going to be affected, seeking advice early and acting sooner rather than later is sensible.
The risk for businesses who aren’t prepared is that the tax will be implemented on an immediate basis. “It’s not like corporate taxes – you don’t wait until the end of the year and then do a return,” explains Tom. “The likelihood is that these taxes will be levied on a monthly or quarterly basis, similarly to VAT. Businesses will need to file returns in almost real-time, putting extra pressure on.”
For further information and advice on tax requirements in the UK and further afield, email us at [email protected].
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