Online sales tax to level the retail playing field?

With online retail search volumes rising – up 15 per cent in Q2 2013 (BRC-Google) – and physical retailers embattled during this economic downturn, calls have been made for a new tax to be applied to online sales.

Online giants have brushed off the suggestion, branding it "nonsense".

Morrison’s boss Dalton Philips said: "As more and more sales migrate online, it seems to me intuitive that you would tax the online channels as well." (The Guardian)

The chief executives of Ocado, Shop Direct, Boden and N Brown responded in a letter to the Chancellor, reading: "Online is a rare and precious success story for the UK and one that we should take pride in. At a time when SMEs in these sectors are attempting to deliver innovation, growth and jobs they should not be choked off by unintended consequences of an unfair tax. There is no logic to penalising companies that provide consumers the convenience, efficiency and value online shopping offers."

However, the issue is heightened further by reports that some of the largest and most successful online retailers – like Amazon – are paying just £2.4m in tax despite seeing a whopping £4 billion in sales (BBC).

Andrew Watters, Partner of Thomas Eggar LLP, Fleet Street, London said: “The row over whether an online sales tax is a good idea mixes Darwinian market forces which give an advantage to certain trading models with the ongoing debate over tax avoidance.

“The market force argument is that digital retailers have a huge advantage over their high street competitors as the model does not incur certain expenses such as increasingly punitive business rates. However, if the high street model fails, it is not simply that a few retail shops will go bust. It will have wider social consequences for the nature of how towns and villages operate.

“The tax avoidance argument is reflected in the recent publicity around companies such as Amazon. A company can locate ‘the business’ offshore although it is servicing UK customers. While it is possible to derive advantages from setting up a head office offshore for more traditional companies, there will usually be some benefit left in the UK, for example high street shops which employ staff and pay business rates. Where an internet retailer sets up offshore, there can be very little activity in the UK. Consequently, the flow of money offshore from UK customers may not be offset by compensating economic activity in the UK.

“Online retailers face an uphill task as the opposition combines local retailers crying ‘foul’, social activists worried about the demise of the high street, and national government worried about a net outflow of monies from UK plc”.