What Is The Online Sales Tax?

As more and more consumers move toward the internet to fill their shopping needs, the Government is discussing whether to introduce a tax focusing on online retail sales.

With trends moving drastically during the Covid-19 pandemic, the Government has reviewed business rates amid the drop in footfall for high street retailers, bringing reforms to help businesses face the short-term challenges.

If implemented, the tax will define and cover online sales taxes for everything from transactions to delivery and hopes to bring balance between online sales and in-store sales for retailers.

The online sales tax (OST) will affect online retail businesses like yours, so here’s what you need to know.

How will it work?

The consultation, which ended on 20 May, suggests that the OST will work similarly to VAT and will be levied and collected by the retailer, but it would only apply for sales made to a UK-based customer.

Although it hasn’t been officially announced, plans for the OST are likely to include a threshold or allowances to exclude smaller retailers from paying the extra tax. 

For those who fit in the scope of the OST, the consultation proposes two ways of calculating the tax:

  • based on revenue –  applying a specific percentage to the value of the relevant sales made
  • a flat fee based on the number of online sales.

There’s no official word on the rate OST will be charged, but it has been previously suggested to be between 1%-2%.

Why introduce it?

As mentioned, with the sharp rise in online retail sales over the last couple of years, the high street struggled during the legal lockdown measures put in place due to the pandemic. 

In-store retailers were left with higher costs and tax obligations when compared to online retailers, so the introduction of OST aims to bring balance to that. Instead of penalising online retailers, the tax looks to generate revenue to help reduce business rates for physical stores.

The proposals for an OST have been criticised by tax professionals, such as the Association of Taxation Technicians (ATT), which believes the implementation of the tax isn’t the best solution to levelling the playing field.

Jon Stride, co-chair of the ATT technical steering group, said: 

“The online sales tax does not meet any of the Government’s tax policy requirements because it is likely to have a distortionary impact on markets, it would not be simple, and it is questionable that it would be sustainable given the necessity to adapt to future changes in shopping patterns and technology.

“If an online sales tax is to be introduced, we strongly recommend that a high threshold is set so that smaller retailers would be excluded from the scope of the tax and the extra costs and administrative burdens it would almost certainly bring.”

What classes as an online sale?

Currently, it isn’t apparent what will fall under the scope of OST as an online sale. 

Whether it’s something sold via social media, paid through a website or app or even goods ordered online but paid for on delivery, there’s a wide range of shopping methods which could fall under the OST.

One focus of the consultation discussed whether click-and-collect services should be exempt entirely. Still, the term click-and-collect can cover a wide range of methods, including, for example, Amazon lockers which are unstaffed and have little connection to physical stores.

What to do next

The consultation outcome is expected to be announced during the Autumn budget. In the meantime, you can find the consultation document on the Government website.

If you’re unsure how the OST will affect your business, the team at Fairman’s is available to discuss your tax rates and help you prepare for any changes that may impact your business.

Get in touch today.


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