Partner Article

Tax change or change tax?

Iain Donaldson leads the Wealth Management team at Matthew Arnold & Baldwin LLP. Here he looks at the case for a tax on online retailers.

There is evolution on the high street. A study for the Centre for Retail Research has found that the growth of online shopping could lead to the closure of one in five high street stores by 2018. Conversely, online retail is predicted to account for 21.5% of all retail sales by then.

The British Retail Consortium is considering whether a tax on online retailers would rebalance this. The idea was (apparently) partly inspired by the Marketplace Fairness Act in the USA which is targeted at online sellers. The proposal for a new UK tax would increase the burden on online only retailers to reflect the fact that high street shops have higher business rates to pay since they have chosen to have physical retail outlets.

The Marketplace Fairness Act is necessary in the US because their system of state sales taxes can’t handle online retailers. Or rather, couldn’t. We don’t have that problem here. The EU system of VAT is quite capable of dealing with cross-border sales, and is under constant review (with further changes in the pipeline for 2015).

Increasing the tax burden of online retail would mean either increased costs to the consumer (and therefore lower demand) or lower profit margins for online businesses who absorb the tax cost. They would suffer this ‘rebalancing’ because they have chosen to avoid having high street stores that are burdened by high business rates.

In truth, the proposal goes beyond taxing online retail. It is a proposal to tax change. In a free market economy, it should be open to retailers to choose the most suitable way to ply their trades (within the confines of the law). If some online retailers have a more efficient business model, eschewing the (albeit expensive) benefit of a high street outlet, and are successful, that is because this best suits their business and customers.

Using tax as a barrier to efficiency and entrepreneurship, particularly in relation to small businesses, is unlikely to be effective. For one thing, online retailers aren’t tied to one location and may react by moving overseas to more receptive markets. Similarly, using taxation to protect the present high street balance seems rather unfair. Larger retailers get the best deals from landlords, usually because they can offer the best rent covenants. They are also better able to manage their space to increase their yield per square foot. The taxation system was not used to protect corner shop owner who complained that they were being driven out of business by the economies of scale of the larger stores on the high street. That shift has been simply a question of economics and competition. That’s not to say that all change is unwelcome, hence the calls for a shake up of business rates.

There are two options – fight change, or embrace it. A tax on online is the former. Online retail is here to stay. Using tax to prop up the high street, an outdated rating system and inefficient operating methods will not work. And to be fair, many high street retailers in the UK have adapted and are leading innovation with their online stores. This is one reason that this new call is surprising.

High Street stores have competed against each other for centuries and now must compete with online retailers. Some big names have disappeared and new more efficient ones have arisen. There have been arguments that ecommerce businesses should ‘morally’ pay more tax in the UK. Perhaps we should change the tax system to make the UK a more attractive country in which those successful businesses will be based. We are competing with other countries who arrange their tax systems accordingly. Perhaps we should rebalance retail by changing the business rating system to not discourage high street stores.

There is inexorable growth in consumer demand to buy things online now. To attempt to deflect that to high street suppliers through the taxation system would be like trying undo evolution. As H.G. Wells said “Adapt or perish, now as ever, is nature’s inexorable imperative.”

This was posted in Bdaily's Members' News section by Matthew Arnold & Baldwin .