Levelling the playing field – What an Online Sales Tax means for central London and how we get it right
In recent decades, the growth of online retail has transformed the sector. This was further spurred by the pandemic, which drove rapid growth at online retailers, and caused significant hardship for many high streets and city centre businesses.
The growth of online retail has led to growing concerns about an imbalance of taxation between online and in-person businesses. Historically warehouses, used for online retail distribution, have had significantly lower rateable values – the estimated annual rental value of a commercial property used to calculate the property’s business rates – and therefore have seen lower business rates bills than high street retailers. This is especially true in London where the rateable value of high street retail properties is at a premium and business rates are a major cost for London businesses. The average rateable value for the retail sector in London is £295 per sqm compared to £82 per sqm for the industrial sector.
HM Treasury recently consulted on introducing an Online Sales Tax (OST), in order to help rebalance the taxation of the retail sector. CLF’s response can be found here.
Given the exponential growth of online retail, and the importance of bricks and mortar businesses to local communities, it is right to look at how we can update our tax system in order to ensure it remains relevant and fair. If well-designed, an OST could help to rebalance business taxation, in order to ensure we have strong and sustainable high streets and town centres, and a fair contribution from online retailers.
However, the design and implementation of an OST is not straightforward. CLF’s consultation response focused on three key questions which government must consider: Firstly, how do you protect small and micro businesses and businesses which operate both online and in-person? Secondly, how do you ensure the change does not further undermine precarious local government finances – which increasingly rely on business rates as a major source of income? Finally, where does an OST fit in with wider tax reform?
Supporting a diverse business community: London is home to over 1 million SMEs, which make a vital contribution to our economy. Some of these could be negatively impacted by the introduction of an OST due to already high operating costs. Government must therefore consider adequate protections for small businesses to mitigate against a higher tax burden.
For businesses operating online and in person, there must be protections to avoid double taxation, particularly as temporary business rates relief and other business support comes to an end in 2023. Businesses should not be discouraged from keeping their high street presence due to increased tax bills. In order to support the recovery of the high street, transactions that promote footfall – such as click-and-collect – should be exempt from an OST.
Protecting local government finances: As grant funding for local government has reduced, local authorities have become increasingly reliant on local taxation – including retained business rates – as their primary source of revenue. This is particularly the case in the capital, where reductions in grant funding have been largest, and where councils are most reliant on retained business rates.
If revenue raised from an OST is to be collected and retained centrally, and if business rates are reduced alongside the introduction of an OST in order to avoid increasing the tax burden on businesses, this presents a significant risk to local authority budgets. Government must ensure that the introduction of an OST does not further undermine local authority funding.
Instead, government should consider including a form of local retention in an OST. This could help diversify income streams and support financial sustainability for local government. If this is not pursued, government should ensure the revenue from an OST is shared with local authorities through grant funding, to ensure that they do no lose out from the changes.
Situating an OST in wider tax reform: Whilst an OST could be beneficial in helping to rebalance the tax burden for bricks and mortar businesses, it would not effectively resolve the structural challenges in the business rates system. If implemented, it will only fund a limited relief for the retail sector.
Consideration must therefore be given to further reform to the business rates system, and fair funding for local government. It is crucial that this government goes beyond the commitments included in the Fundamental Review of Business Rates to increase the frequency of valuations, and reform the VOA and appeals system. This should focus on creating a fairer system for businesses, stability and certainty for local authorities, incentivise growth and reduce complexity in the system. This should be considered in tandem with the commitment to ensure funding allocations for councils are based on up to date assessments of their needs and resources as committed to in the Levelling Up White Paper.
Efa Gough is a Policy Officer at Central London Forward – 13.6.2022