As business rates continue to sink many floundering High Street shops, Chancellor Hammond has announced plans to find a ‘better way of taxing the digital economy’ to reduce online stores’ tax advantage. ParcelHero’s Head of Consumer Research, David Jinks MILT, questions whether a new tax on the one growing area of retail is the best solution.
The Chancellor of the Exchequer, Philip Hammond, announced in his Spring Statement that he would be looking to introduce new taxes on digital firms, as business rates continue to hit High Street businesses hard.
Excessive business rates are being condemned by large retailers and the Federation of Small Businesses alike, but the Chancellor is staying firm on them, saying they help stabilise local Government funding. He argues a new tax on e-commerce will lessen the tax advantage for online businesses. But is the real cure for plummeting High Street sales to introduce a new digital sales tax on online businesses? To save a sinking ship do you torpedo another? And could multiplatform ‘brick and click’ stores end up paying high business rates and the new digital tax as well?
X-Rated – the horror of Business Rates
Business rates are calculated based on the cost of a property that a business occupies, and there is no doubt that High Street retailers in prime locations have been very hard hit. Business rates were re-evaluated in 2017 after a seven-year gap, and the resulting jump in rateable values in some areas meant many businesses were left reeling by the change.
As companies from House of Fraser to Poundworld have shown; the cost of keeping town centre premises open is no longer in line with dropping revenues. High Street retailers face the perfect storm of declining footfall, higher business rates and high legacy rents inherited from the days when store incomes were considerably higher.
That’s why BHS was still busy negotiating a Company Voluntary Agreement (CVA) to reduce rents even as it went under, and why House of Fraser has been so keen to ensure its own CVA is successful. Add inflated rents and business rates together and it’s a toxic mix for High Street retailers.
The influential second Grimsey Review of the High Street, released this summer, says: ‘Business Rates have grown into a massive tax collection vehicle for government… This colossus has grown and grown, it does not reflect the additional costs to provide services to those businesses anymore.’
Alarmingly, commercial property taxes in the UK are now the highest in Europe. An investigation from Altus Group found that nearly 200,000 businesses have faced a magistrate for not paying their business rates in 2017-18. It revealed almost one in every six commercial properties received a summons to appear before a magistrate last year.
In a statement akin to Captain Smith saying the iceberg might delay the Titanic’s voyage slightly, Mr Hammond acknowledges: “The Government recognises that business rates can represent a high fixed cost of some businesses.”
But nonetheless there is no sign that the Government intends to back down on the current business rates.
That’s very bad news for businesses who believe their premises have been overvalued. And woe betide businesses that try to appeal what are patently unfair taxes in some locations: the number of appeals has dropped by more than 99% from when the system was introduced in April 2017 to the end of last year.
The collapse in challenges was a direct consequence of the difficulties companies are reporting using the new “Check, Challenge, Appeal” system, which places the burden of proof on companies themselves. Between April 1, 2017, when the new system for appealing business rates was introduced, and December 31, 1,210 valuations were challenged in England. Just one case made it to the “appeal” stage during the whole period.
The collapse in the number of appeals may also be partly due to the £500 fine on businesses proposed by Government if retailers are deemed to have wrongly appealed. The proposed civil fine for companies failing the Challenge process seems a harsh proposal. The Government’s plans say: ‘In line with other parts of the tax system, this includes the proper use of penalties for providing false information. The maximum level of penalties will be £500 for the provision of false information “carelessly, recklessly or knowingly”, with a right of appeal to the Valuation Tribunal for England (VTE). However, we will propose lower penalties for small businesses.’
If you are wondering why the Government’s approach to business rates is quite so Draconian, remember, Business rates raise £25bn a year for the Treasury!
Granted the fact business rates are a severe drag on High Street businesses; what does the Government plan to do to rescue sinking High Street stores? Will it listen to the arguments coming from Grimsey, the British Retail Consortium or Tesco boss David Lewis that business rates need urgent reform?
The answer so far is a resounding ‘No’. Chancellor Hammond argues that business rates support the stability of local government funding. Instead his answer is a new tax; this time on online retailers and businesses. He argues it will help to level the playing field.
It’s a move supported by some retail groups; however, considering retailers large and small, brick & mortar, online, or a click & brick mix, are all struggling, many retail analysts question its wisdom.
The Digital Tax changes course
Most UK retailers, from large High Street stores to small online traders, were enthusiastic about the Government’s initial digital tax proposals. The original, widely welcomed, idea was largely to ensure overseas tech giants such as Google and Facebook paid taxes where they were earned. The proposals came amid concerns the existing system did not tax multinational online giants where they made their money, giving them an unfair advantage over native British High Street chains.
Already the Diverted Profits tax – nicknamed the ‘Google Tax’ – introduced in 2015 means online giants engaged in tax avoidance by shifting profits overseas that were originally generated in Britain are taxed at 25% – compared to the current UK corporation tax rate of 19%. And in his Spring Statement this year Philip Hammond also pledged to charge income tax on royalties relating to UK sales, even when they are paid to a low-tax jurisdiction.
The argument is that the big, global digital companies pay little tax in the UK. Instead they channel sales through countries with more favourable tax regimes, for example, Ireland and Luxembourg; something that has spurred public protests in recent years. Many UK businesses, large and small, came out in support of this initial Digital Tax.
However, it now seems the Chancellor has UK online retailers firmly in his sights too in a new phase 2 digital tax.
This summer Hammond told MPs he was looking to “find a better way of taxing the digital economy,” to lessen tax advantages for online retailers compared with those who have physical stores – expanding his assault on online businesses beyond overseas giants.
The move was backed by several High Street retailers and retail organisations; including the New West End company, a partnership which represents more than 600 businesses in London’s West End, such as Selfridges, Marks & Spencer and Fenwick. It suggested that a 1% sales tax on online businesses’ revenues could provide more than £5bn relief for High Street retailers’ rate bills.
But other organisations are distinctly less enthusiastic. For example, Chloe Westley, campaign manager at the TaxPayers’ Alliance, told City AM: ‘Websites like Amazon and eBay provide a service that is not only popular, but also makes life more affordable for those struggling to get by. Why would the government want to take that away from people by increasing the tax on these businesses?’
She argues: ‘The tax burden is approaching a 50-year high, and the bottom 10% of earners already pay half of their income in tax. Instead of punishing the poorest in society by taking even more of their money, the government should be reducing the taxes on high street shops that cut so deeply into their margins.’
And remember that online is where fledgling entrepreneurs can try out new ideas, without risking the expense of a physical store – though one may well follow if an idea takes off.
As things stand, while online business do enjoy a tax advantage, the cost burden on online businesses versus High Street retailers is far from a one-way street. Profitable online limited companies already pay corporation tax at 19% and VAT at 20%. They may also be paying business rates on warehousing and offices – though these are likely to be in lower rateable areas than city centre stores.
And there are costs that online businesses face that established High Street stores don’t. Online retailers generally have significantly larger technology investment and delivery and returns costs, which may well balance out traditional retailers’ higher rents and rates.
The failure rate of online businesses is significant. Selling online isn’t an automatic way of beating the High Street, and only the best businesses survive. Online retail has no inherent advantage over brick and mortar businesses.
What about brick n’ click?
The most successful retail businesses today have a mix of physical store and e-commerce sales. Multiplatform sales are the key to a successful modern retail business. Would a new digital sales tax apply to online sales for businesses with High Street stores as well as pureplay online businesses? That seems likely. In which case those retailers that are weathering the business rates storm could be hit by even more taxes.
The number of businesses limited to just a physical High Street store is decreasing as retailers large and small realise ‘if you can’t beat ‘em, join ‘em.’ That means local entrepreneurs owning small specialist shops, such as vintage clothing stores, model shops or craft stores, that have made the successful transition to owning a complimentary web site; or selling on marketplaces such as eBay, could be hit with a second round of digital taxes on their online sales; in addition to paying exorbitant business rates.
It’s hard to understand how a double whammy of business rates and a new tax of 1% on online sales – if this is the final route chosen by the Chancellor – helps solve the original problem, that the British High Street is nearing collapse.
Let’s not forget fledgling businesses such as small marketplace traders have already been hit by changes in tax laws which mean online marketplaces will be jointly liable with sellers for VAT and are actively enforcing VAT payment. Online businesses are far from getting a free tax ride. The Government is also looking at a split VAT payment model to reduce online VAT fraud and improve how VAT is collected. Digital platforms have been asked to play a “wider role in ensuring their users are compliant with the tax rules”, and the Government published a call for evidence in its Spring statement to explore what more can be done by digital platforms.
And, despite all the Chancellor’s efforts to pin down taxation on payments made on UK sales by multinational e-commerce giants, he admits the problem is still not resolved. Even an extension to the ‘Google Tax’ scheduled for April 2019, targeting UK sales by e-commerce foreign giants such as Amazon and Google, will not work entirely. This month the Chancellor acknowledged: “This does not solve the problem, but it does send a signal of our determination and we will continue work in the international arena to find a sustainable and fair long-term solution that properly taxes the digital businesses that operate in our cyberspace.”
Yet, while missing the largest and most slippery international e-commerce companies, the new digital taxation plans will directly hit UK-based web stores – leaving them at a disadvantage against the large multinationals. So, by trying to balance the playing field between High Street and web stores, the Chancellor is in danger of introducing a new unfair advantage for large overseas e-commerce companies over UK-based web stores.
Of course, the Chancellor’s final proposal for the digital tax may be something far more sophisticated than the simple 1% online sales tax proposed by some retail organisations. MP Neil O’Brien, a former Downing Street adviser and co-founder of the Onward think-tank, has proposed an even steeper 3% online sales tax; but there are other ways of taxing revenues. The Government’s latest paper is looking at user created value; in other words, taxing businesses that rely on user participation to generate content, and sell advertising around this. But this is clearly a longer-term aim.
In the meantime, Chancellor Hammond seems to be in a hurry to introduce some kind of digital tax, telling the Treasury Select Committee in July that before he thinks about looking at business rates again he wants to introduce his digital tax:
“we need to find a better way of taxing the digital economy…It is right that we make further progress on this issue before considering the implications for the wider tax system.”
Whatever the shape of a new digital tax, is now the right time to launch significant changes? It looks like an increasingly unfavourable taxation environment for e-commerce businesses is being contemplated; just as Brexit plans seem likely to impose new costs on digital services.
Should the Government be steaming ahead with new tax on the digital economy, or is a simpler answer to the woes of the High Street a reduction in excessive Business Rates?