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  1. Business
1 March 2021

Why an online sales tax isn’t the cure the high street needs

The best way to help the high street is to make sure that digital retailers pay more tax under the existing system.

By Will Dunn

When Rishi Sunak announces the Budget on Wednesday, high street businesses will be listening for the announcement that he is planning to extend the “business rates holiday” – surely the most 2021 holiday you can have – which is currently set to end in April.

The holiday is likely to continue for now, but even coupled with “restart grants” it will only buy a little more time for a high street still suffering deep, long-term problems. For businesses to have the confidence to invest in a more hopeful post-pandemic period, they will need to feel less doomed in the present and this rests partly on whether or not Sunak can find a way to reduce business rates in the autumn.

The difficulty with this is that because business rates are really expensive – a small business can easily spend more on tax than it does on staff – they represent a big chunk of income to the Exchequer (around £25bn a year). So, any reduction will need to be paid for and the obvious candidates for the bill are the online businesses that are widely seen as putting the high street out of business.

But the distinction between the high street and the internet is false.

A 2 per cent charge on online sales – one suggested “Amazon tax” – will not save the high street because high-street shops are almost all online too: John Lewis, PC World and other major high-street retailers would lose more in online sales tax than they would save in business rates if one were used to pay for the other.

The real distinction is not between the high street and the internet but between taxpayers and non-taxpayers. What the high street needs is not a new tax on the internet, but for the taxes that already exist actually to be collected.  

In January 2016 Lin Homer, then head of HMRC, was asked by the Public Accounts Committee what the tax authorities were doing to combat an estimated £10bn in unpaid VAT from overseas sellers on online marketplaces such as Amazon and eBay. This rampant, untaxed retail put the entire UK high street at a competitive disadvantage. Homer described Amazon and eBay as “marketplaces in the ether”, that could not be held accountable for the tax evasion that took place on their platforms. But their products did not materialise from the ether; they came from the same factories and warehouses as everything else.   

It took the government almost five years from that meeting to implement the 2020 Digital Services Tax (DST), and when it did it actually handed Amazon another advantage over the high street. What HMRC failed to realise is that not only are most high-street shops online, many of them are also on Amazon. The retail giant’s global brand and its primacy in search results mean many shops reach a bigger market by paying to sell on Amazon. This applies to established high-street chains such as Lakeland, Shoe Zone and Mountain Warehouse.

So, when Amazon passed the cost of the DST on to sellers on its marketplace (as it said it would when the policy was announced), their fees rose. But because the DST is charged on the service Amazon provides to sellers, the items Amazon itself sells are not subject to it. The only business not being charged more to sell on Amazon was Amazon itself. So the new tax, designed to give the high street a chance, actually does the opposite. Any business selling a product Amazon also sells can be undercut by the platform itself. 

One chief executive of a high-street chain that sells on Amazon told me it was “utter madness” that this would be the result of a tax designed “in part to rebalance the inequality that exists between large, tax-dodging multinational tech companies that declare most of their profits offshore, and domestic UK businesses who pay all our taxes here”.

Amazon, the CEO told me, “has to be the only marketplace in the world where the owner of the market competes directly with the market traders and can also collect data on all of their customers.”

And not only do high-street shops have to compete with Big Tech platforms such as Amazon and eBay, but with overseas sellers. These platforms are now supposed to collect VAT on items under £135, but HMRC has all but given up checking whether this is actually happening, having reduced enquiries by 97 per cent. Britain is losing up to £1.5bn a year in unpaid VAT from overseas sellers. And this is only part of the damage, because for every tax-paying UK business that goes under, the economy takes a still greater hit. 

Richard Allen, the tax campaigner who fought an epic battle against businesses that used the Channel Islands to avoid paying tax, describes the current state of VAT oversight on items arriving from overseas as “prehistoric”. An online sales tax, he says, “will just cause an even bigger problem. It’ll be yet another tax for online retailers to avoid.”

And VAT is not the only tax dodge that the high street has to worry about. I’ve been shown evidence of large-scale reduction in the sizes of offices, which are broken up into multiple “hereditaments”, each of which gets business rates relief. This means that offices – especially subdivided co-working spaces – can occupy the high street much more cheaply than shops.  

Nor is the high street going to be saved by the century-old idea of an “excess profits tax” on companies that have done well in the crisis. If Big Tech companies were making huge profits, they would be paying a lot more tax; the fact that they prevent so much revenue from becoming profit is exactly why they pay so little tax.  

Online retailers are understandably keen to propagate the myth that the high street is doomed because it is old-fashioned, inefficient and overpriced. But it is a myth; prices are the same most of the time, the customer has more control when they can see what they’re buying, there are no delivery charges and increased package delivery causes traffic congestion and air pollution.

This could have been a boom year for the high street, as a country that is now heartily sick of screens and deliveries reemerges with £125bn in its back pocket. But the high street is still at a competitive disadvantage, not because of its own failings but because it pays its taxes.

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