Tuesday 28 July 2020 12:51 pm

A digital tax is no way to reward our innovative online retailers

Sam Dumitriu is research director at The Entrepreneurs Network.

Throughout lockdown, the advantages — indeed, the essentiality — of online retail became clear.

Now, Rishi Sunak is rumoured to be mulling over a new online sales tax. 

Advocates for this new tax, such as SportsDirect owner Mike Ashley and Tesco boss Dave Lewis, believe that the existing business rates system creates an uneven playing field favouring online retailers over traditional high street shops, and that the former should be penalised. 

Read more: Rishi Sunak mulls online sales tax for e-commerce retailers

There’s a superficial appeal to their argument. Amazon’s out-of-town warehouses do indeed attract a fraction of the rates bills that smaller high street retailers pay.

But complaining that Amazon using out-of-town-warehouses gives it an unfair advantage over the high street is like complaining Liverpool has an unfair advantage over Norwich City by having better players. In retail, being efficient isn’t an unfair advantage.

Remember, headline tax figures can mislead. A key lesson from the economics of taxation is that the person who hands over the money isn’t necessarily the person who ends up worse off.  Businesses pay VAT, but pass on the costs to consumers through higher prices. 

Something similar happens with business rates. Strict planning laws keep the supply of commercial property fixed, and when the supply of a good is fixed, its price is determined by its demand. From the perspective of a retailer, rates are simply another cost attached to renting a storefront. When rates go up, the amount a business is willing to spend on rents falls.

Economic theory predicts that commercial landlords, not tenants, end up bearing the burden of rates. To a non-economist, it might sound crazy, but it’s backed up by real-world evidence. The British Property Federation, for example, finds that rents fall in proportion to a rate rise over a three to four-year period.

There’s another problem with Sunak’s idea. An online sales tax won’t just punish the Amazons of the world. Since the lockdown, thousands of small shops have used e-commerce to stay afloat and diversify their income when the government shut down their ability to trade physically. In fact, the government is rumoured to be looking at ways to build on SMEs’ shift online during lockdown.

Hitting them with an online sales tax while encouraging the move to digital would be like banning “Buy One Get One Free” offers on junk food a few days before you start subsidising half-price Big Macs. Surely, no government would be that incoherent?

Ashley and Lewis are right that business rates need reform. But hitting online retail with another tax isn’t the right way to do it. 

Online sales taxes aren’t the only option on the table. There are reports that the chancellor is also looking at replacing rates with a tax levy on commercial landlords based on the property’s value. This would spare tenants painful readjustments when rates are revalued, but it’s still not ideal. By taxing the value of the property, it would discourage landlords from making renovations or improvements. A better solution would be to only tax the value of the land underneath.

However business rates are reformed, the way to “save our high streets” is clearly not to make the alternative worse, but to make high streets more attractive and popular. To that end, recent changes that make it easier to convert shops into restaurants or workspace — or indeed, residential flats — are welcome. 

People don’t want to preserve our high streets in aspic. Rather, they want to prevent their town centres from falling into disrepair. A new model where more people live on high streets with cafes and restaurants opening to serve the new residents and hybrid workspaces offering an alternative to the commute makes a lot more sense than trying to preserve shops that people don’t actually want to go to anymore.

And it certainly makes more sense than a new digital tax that would be an insult to the innovative online businesses that have go us all through lockdown.

Read more: US senators warn that UK digital sales tax could stop free trade deal

Main image credit: Getty

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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