Time and time again over the past few months, we’ve heard prominent figures in the retail world call for a special sales tax on online companies to help prop up their struggling sector, from the Tesco chief executive Dave Lewis, to the New West End Company that represents Selfridges and Marks & Spencer.
Chancellor Philip Hammond has stated his openness to introducing such a “Digital Services Tax” on sales, possibly as soon as next week’s Budget.
This would be a huge mistake.
It is of course undeniable that the global tech giants, including Amazon, Ebay, Google and Facebook, use clever accounting tricks to minimise their profits – and subsequently corporation tax payments – in the UK and elsewhere.
But if we want to level the playing field, the government’s aim should be to get those specific companies that game the system to pay their fair share of tax.
What is ultimately needed, as the OECD argues, isn’t for individual countries to act unilaterally, but to work together towards a new international system for taxing profits that reflects the complex nature of value creation in a digital economy.
While a tax on sales could be used as a temporary measure until agreement is reached, it would itself need to be international and strictly targeted at proven tax avoiders.
Instead, the digital tax that advocates are demanding would indiscriminately slap a levy on every business that happens to mostly sell online. This essentially amounts to tax-code cronyism, and would set a dangerous precedent by encouraging other sectors to seek special protection from disruptors.
A big problem is that somehow the question of how to tax the big online players is getting tangled up in emotive cries to rescue the fortunes of high street shops.
Ultimately, getting the tech giants to pay their fair share of tax – though desirable in itself – is not going to save our high streets from oblivion. Bricks-and-mortar retailers are struggling because of longer-term structural reasons that have little, if anything, to do with the tax.
Business rates are often pointed to as the villain, but these have been around for decades without killing the high street. While it might feel unfair that a high street shop is charged more than an online store, it is entirely logical that companies trading from warehouses in less valuable areas pay less in property tax – which is after all what business rates are.
As well as competing with online-only businesses whose overheads are far lower, traditional retailers are facing a profound shift in shopping habits towards buying on the internet.
Increasing numbers of people, particularly millennials, prefer the convenience of ordering at the click of a button to trudging up and down the high street. That isn’t a value judgement that can be solved by slapping on a tax, and it doesn’t look like it’s changing anytime soon.
While we will continue to value visiting physical stores, it is now widely acknowledged that there will be less retail space in our future towns and cities. The gap will be filled by new opportunities for work, leisure, education, culture, healthcare, and housing.
Rather than trying to fight this change, the government could make a real difference to struggling high streets by giving local authorities the powers and funding they need to respond proactively to the new economy, for example through joined-up redevelopment plans and retraining schemes, as is argued by leading businessman Bill Grimsey in his recent report, The Vanishing High Street.
Any digital tax must be proportionate, internationally-backed, and based on clear proof of avoidance, not used as an excuse for a luddite levy on all online commerce. We can only hope that Hammond is able to resist calls to play favouritism with the tax system.