An online sales tax would be a small hassle for Amazon, but a hard blow for our shops
The Treasury is considering whether to introduce an online sales tax (OST) as a “means to rebalance the taxation of the retail sector between online and in-store retail”. A decision is expected in autumn – probably as part of the Chancellor’s Budget.
If the government has any sense, it will run a mile from taking the OST from consultation to reality. Going ahead would be bad for consumers, for business and for the government’s wider political agenda.
It would also be unpopular, with opposition to the tax more strongly felt than support for it – especially in ‘red wall’ regions the Tories are desperate to cling onto at the next election. Only Londoners and high-earners appear to favour the OST.
Consumers are already suffering the impact of soaring fuel and energy costs, inflation at 9 percent a year and rising, and National Insurance increases that eat into take-home pay. Putting a new tax on consumer spending now would be perverse.
Make no mistake: consumers will bear the brunt of this tax, even if it’s levied on sellers. Eighty-three per cent of businesses would pass its cost onto their customers, according to polling by Public First. Modelling by Oxford Economics indicates that consumers would absorb 72 percent of the burden.
To make matters worse, the impact of the tax is likely to be felt most keenly in parts of the country that the government wants to level up – the relative burden being highest in the North-East. As for jobs, anything that hurt online retail would hit hardest in the Midlands, where warehousing and delivery work is particularly significant.
That brings us to the business impact of an OST. Its advocates sometimes give the impression that there is a clear line between online and in-store retail. But in a country where the majority of businesses sell products online, and another third say they plan to start doing so, it is really hard to tax online sellers without hurting ‘real world’ ones too.
The OST is often dubbed ‘the Amazon tax’ by its advocates, with the implication that it will only target the biggest businesses. Yet our brief experiment with another online levy, the digital services tax, shows how unlikely to be realised such expectations are. Faced with that tax, Amazon increased the fees it charged third-party sellers using its platform. As of 2020, small and medium businesses accounted for 60 percent of sales on amazon.co.uk. Plainly, it’s hard to tax big businesses without hitting smaller ones.
Ultimately, we would be stuck with an unpopular tax that runs counter to the government’s cost of living and levelling up agendas, and would hurt businesses and consumers. It could also be a nightmare to implement, as the government’s own consultation paper makes clear, and risks establishing the UK as an inhospitable destination for technology and innovation.
So why even discuss it? Well, the government insists that it isn’t meant to discourage online retail – just raise some money to cut business rates for high street stores. That’s a worthy goal in its own right.
Indeed, cutting business rates through a fundamental overhaul of the system isn’t just what Boris Johnson’s 2019 manifesto promised, albeit implicitly: it is also one of the best things we could do to make our tax system more competitive, more supportive of business, and more pro-growth.
But that agenda should be part of a broader effort to reform and rebalance the tax system. Tying any prospect of business rates reform to a new tax – especially one as problematic as this one – is short-sighted and likely to prove counterproductive.