Perhaps unsurprisingly, as part of the 2022 Autumn Statement, the UK Government announced that it had decided against implementing a new tax on online sales (OST); the much-anticipated result of HM Treasury launching a consultation to explore the policy arguments for and against its introduction as an outcome of a review of the business rates system. This has since been confirmed in the Government's consultation response published on 9 February 2023. The Government acknowledged an OST regime would be unnecessarily complicated.
Ultimately, the introduction of an OST would not have been capable of rebalancing perceived imbalances in the current system and is not the solution to redress these imbalances and current inbuilt difficulties, largely because they would be taxing different things – sales vs property rental value.
As acknowledged in the Spring Budget, business rates play a key role in generating revenue, raising £25 billion per year in England alone, but it is also evident that there are difficulties with the current system, with the reported tax imbalances it creates – specifically between the high street and online retailers. Business rates are not linked to a company's profitability and heavily impact the brick and mortar retail sector despite recent targeted reliefs. The consultation was a result of the mounting industry pressure from some retailers to mitigate the disproportionate effect of business rates, which are based on commercial rental property values, on the brick and mortar high street retailers.
The extensive engagement with the Government during the consultation, with the submission of 3,037 written responses, shows the level of debate generated by the introduction of an OST. A large majority of these respondents opposed the introduction, as they saw an OST as an unsuccessful way of trying to level the playing field and address distortions in the current system. There was almost no support for an OST as a standalone policy.
Many respondents to the consultation were concerned about the complexity and administrative burden an OST would place on retailers in addition to constraining the growth of smaller independent retailers.
The outcome to the consultation, published on 9 February 2023, notes that a percentage of respondents put forward that if an OST was to be implemented, it should be done as part of the VAT system to tackle administration and compliance issues that may arise. The Government might consider that the VAT system itself can serve as a workable alternative to an OST, such as increasing the applicable rates and/or scope of VAT and using revenue to fund specific reliefs from business rates.
Instead, the Government's present approach is to continue with the (more superficial) reform of business rates, including more frequent revaluations (and tweaks to transitional relief when bills do go up and down) with it being estimated that (for England) the total business rates paid by those in the retail sector will fall by 20%, whilst large distribution warehouses, including those used by online retailers, will see a 27% increase in business rates payable. Arguably, a more efficient and simpler way of redressing industry imbalances, the benefit to this approach is that the regime is already in place and will not add a further administrative burden imposed on retailers for an already over-burdened sector following the pandemic and other recent policy measures. Notwithstanding this, issues remain surrounding the perceived imbalance of the bricks vs clicks retail industry, and we anticipate further measures over the coming years in a recycled attempt at redressing the sector's inbuilt difficulties. Whether this will be a success or not remains to be seen.
It's worth remembering that business rates are a devolved tax, and the regime and available reliefs, differ in each of England, Scotland and Wales. With the Spring Budget promise of further devolved powers to collect and retain business rates for the West Midlands Combined Authority and the Greater Manchester Combined Authority, and the future ability of local authorities to set their own rules for notification of reliefs in their areas from 1 April 2024, the business rates landscape is becoming ever more complex particularly for companies operating UK wide in the retail sector.
Ultimately, the introduction of an OST would not have been capable of rebalancing perceived imbalances in the current system and is not the solution to redress these imbalances and current inbuilt difficulties, largely because they would be taxing different things – sales vs property rental value.
As acknowledged in the Spring Budget, business rates play a key role in generating revenue, raising £25 billion per year in England alone, but it is also evident that there are difficulties with the current system, with the reported tax imbalances it creates – specifically between the high street and online retailers. Business rates are not linked to a company's profitability and heavily impact the brick and mortar retail sector despite recent targeted reliefs. The consultation was a result of the mounting industry pressure from some retailers to mitigate the disproportionate effect of business rates, which are based on commercial rental property values, on the brick and mortar high street retailers.
The extensive engagement with the Government during the consultation, with the submission of 3,037 written responses, shows the level of debate generated by the introduction of an OST. A large majority of these respondents opposed the introduction, as they saw an OST as an unsuccessful way of trying to level the playing field and address distortions in the current system. There was almost no support for an OST as a standalone policy.
Many respondents to the consultation were concerned about the complexity and administrative burden an OST would place on retailers in addition to constraining the growth of smaller independent retailers.
The outcome to the consultation, published on 9 February 2023, notes that a percentage of respondents put forward that if an OST was to be implemented, it should be done as part of the VAT system to tackle administration and compliance issues that may arise. The Government might consider that the VAT system itself can serve as a workable alternative to an OST, such as increasing the applicable rates and/or scope of VAT and using revenue to fund specific reliefs from business rates.
Instead, the Government's present approach is to continue with the (more superficial) reform of business rates, including more frequent revaluations (and tweaks to transitional relief when bills do go up and down) with it being estimated that (for England) the total business rates paid by those in the retail sector will fall by 20%, whilst large distribution warehouses, including those used by online retailers, will see a 27% increase in business rates payable. Arguably, a more efficient and simpler way of redressing industry imbalances, the benefit to this approach is that the regime is already in place and will not add a further administrative burden imposed on retailers for an already over-burdened sector following the pandemic and other recent policy measures. Notwithstanding this, issues remain surrounding the perceived imbalance of the bricks vs clicks retail industry, and we anticipate further measures over the coming years in a recycled attempt at redressing the sector's inbuilt difficulties. Whether this will be a success or not remains to be seen.
It's worth remembering that business rates are a devolved tax, and the regime and available reliefs, differ in each of England, Scotland and Wales. With the Spring Budget promise of further devolved powers to collect and retain business rates for the West Midlands Combined Authority and the Greater Manchester Combined Authority, and the future ability of local authorities to set their own rules for notification of reliefs in their areas from 1 April 2024, the business rates landscape is becoming ever more complex particularly for companies operating UK wide in the retail sector.
