Following last October’s Budget, the government published its final report into the review of business rates, stating it would consider “the arguments for and against an online sales tax which, if introduced, would raise revenue to fund business rate reductions”. This online sales tax consultation was launched in February 2022, asked 40 questions and closed on 20 May. We are now waiting for the government’s response. The consultation arose following calls from the retail and rating industry (including Colliers) for a fairer retail playing field and a tax system that does not penalise high street retailers, which pay business rates on their physical stores, compared to purely online rivals that do not – and therefore are able to undercut their bricks-and-mortar competitors.
The scale of the problem
The issues surrounding the introduction of an online sales tax are complex. High business rates on the retail sector have been cited as a key component for shop failures and the decline of the high street in recent years. The British Retail Consortium highlighted in its report Retail, Rates and Recovery: How business rates reform can maximise retail’s role in levelling up, published last September, that 83% of retailers said it is “likely”, “very likely” or “certain” they will close shops if the business rates burden is not reduced.
According to the Office for National Statistics, physical retailers pay a disproportionate amount of the business rates burden – £7.26bn, between a quarter and a third of the total bill – despite the gross value-added from retail being less than 10%. And, of the total rates bill paid by the retail sector in 2018/19, 94% was funded by the high street and only 6% by online retailers. Recently, figures from property advisory firm Altus Group revealed that high street retailers pay 755% more in business rates than their online rivals.
This discrepancy became even more of an issue following the increased popularity of consumer buying online during the pandemic. Some 32% of UK sales took place online in 2021, up from 29% in 2020 and 21% in 2019. This is a trend set to continue, with forecasts that 38% of UK retail sales will take place online by 2026. It is therefore surely not surprising that many of the big names in the sector believe online retailers should take up some of this tax burden. Retail giants including Tesco, Sainsbury’s and Morrisons have formed the Retail Jobs Alliance, a coalition to petition the government for a permanent business rates cut funded by the introduction of a new online tax.
Colliers’ consultation response
We believe the OST is one of several potential solutions to help the high street against what is perceived as unfair competition from the likes of Amazon and other online rivals, and should be seen as part of the levelling-up agenda.
In our response to the consultation, we state our belief that “any remote sale that results in the delivery of a physical good in the UK should be subject to an OST”. We believe focusing on remote sales reduces the system’s complexity.
Of course, it is not all black-and-white, particularly as the distinction between online and high street becomes increasingly blurred and there are many retailers that have both an online and a shop presence – such as John Lewis or Next, which already pay high business rates on their stores and are concerned about facing a double bill. As one opponent to the new tax said in our recent survey on the issue: “Retail needs less taxation not more.”
There have also been concerns that introducing an OST will only lead to e-tailers putting their additional costs on to the consumer.
And there are the issues of those small retailers that moved and invested in online because they had to during the pandemic. Some fear a new tax will stifle a burgeoning industry that is helping the economy recover from Covid-19.
Colliers’ response is based on the premise that we need to promote footfall in local high streets, but that it is important to avoid double taxation on shops already paying business rates. We therefore believe that, because click-and-collect drives footfall into physical retail locations, and therefore to town centres and high streets, it should be exempted from the OST unless the item in question is delivered by a third party (eg Deliveroo). Overall, exempting click-and-collect would not only drive footfall but avoid penalising the retailer with a double tax.
Goods, particularly bulky goods, are often ordered in person but delivered to home. Given our desire to promote footfall in high streets, we believe an item purchased in-store but delivered remotely should not be subjected to the OST. However, if a purchase of the same item is made online, it should be subjected to the OST.
Overall, it looks like the industry agrees. We recently took a snapshot survey among our retail landlord and retail occupier clients, whereby 89% of respondents revealed they would be in favour of the introduction of some form of OST to take the pressure off business rates. The vote for an OST was most supported by retail landlords and investors (98%). But even 71% of retailers that already have an online presence supported the new tax and (unsurprisingly) 100% of those that don’t have an online presence support one too.
The fine details
The government’s consultation also canvassed views on other complexities, such as where there should be exemptions to the OST (ie for essential goods or digital products). Our position at Colliers is that takeaway foods ordered online should be subject to the OST. However, we believe that non-physical goods and services should be exempted. Perhaps we can learn from Canada, where any item with a physical storage medium that is purchased online and delivered to the consumer is subject to the OST. An item ordered online without a physical storage medium, such as an e-book or software, is exempt.
The consultation asked about whether services should be taxed. At Colliers, we believe the OST should be about taxing goods not services.
It asked about what should happen to intermediaries involved in the sales process. Our response is that the responsibility to pay the OST should be incumbent on the vendor. However, vendors should be able to enter collection arrangements with intermediaries where convenient. If the underlying vendor is overseas, then it may be sensible to have the UK intermediary responsible if the overseas company does not pay the OST.
The consultation also asked whether the tax should be based on a revenue or flat-fee approach. We believe a flat-fee approach would risk replicating the worst aspects of the business rates system and would have a greater distortive impact on the consumer. We would prefer a model predicated around revenue-based turnover, to more accurately reflect changing market conditions and trends.
What impact would an OST have?
In our opinion, much depends on how exactly the government decides to impose the tax, given the considerations above, how much it intends to raise from it and what the monies raised are used for. To have any impact, it is essential any new retail tax revenue is used directly to alleviate the heavy business rates burden on retail and does not just go into a government black hole, as many detractors of the scheme fear.
Oxford Economics estimates that a 2% OST would raise £1.6bn, which would be 22% of the £7.26bn currently paid by retail (with a range of between 20-30% depending on the final design). Our belief is that a circa 26% reduction in the burden on businesses would have a substantial impact and breathe new life into retail locations. It will increase occupancy of vacant stores and lead to new entrants into the high street. We do not believe, as some fear, that it would lead to landlords introducing rental rises on the grounds that occupiers can pay more, since in a world where there is plenty of vacant shop space, no landlord can afford to raise rents. Business rates reductions would reduce total occupation costs for retailers and enable them to compete with their online counterparts.
We are also adamant that introducing some sort of OST must not divert the government’s attention from the bigger need – a fundamental reform of the current business rates system. This should include rebasing the multiplier to 30p in the pound from current levels of more than 50p, which has made the tax so unmanageable, a review of the outdated reliefs system and more frequent (annual) revaluations so business rates bills more accurately reflect current rental values. For retail, this would make rates bills considerably lower.
We also advocate the removal of downwards transition following the next revaluation and that business rates reductions are implemented immediately rather than spreading them over the years of the list in a transitional arrangement, as they did following the last revaluation in 2017. This had a major detrimental impact on the high streets of many of the UK’s provincial and poorer towns. It must not be allowed to happen again.
Introducing an OST will not solve all the issues facing the high street, but it is a step in the right direction, provided it is properly thought through, not imposed in isolation, and used for reducing the burden of business rates. It should be part of creating a much fairer and more balanced system, supporting the levelling-up agenda and enabling 21st century retail to thrive. Let’s hope the chancellor listens.
John Webber is head of business rates at Colliers
