retail

Online tax set to push up costs for many of UK’s high street retailers

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Some leading UK high street retailers face potentially higher taxes if the government imposes a charge on online sales to fund a reduction in business rates, Financial Times calculations have shown.

Fashion retailer Next, electricals group Dixons Carphone, cycle retailer Halfords and department store chain John Lewis could end up paying more if a tax on ecommerce were implemented.

The Treasury is reviewing the future of business rates, which retailers regard as punitive, out-of-date and unfair. It is due to report its conclusions in the autumn, and a current year-long relief from the tax is likely to be extended in the meantime.

One of the options for reform is a tax of about 2 per cent on sales made online. Given that the Treasury has signalled it is unwilling to countenance wider reform of corporate taxation or local government finance, an online sales tax is regarded as one of the preferred options.

The proceeds could be used to reduce business rates, which are calculated by applying a tax rate — or “multiplier” — to the annual rental value of a property. Cutting the multiplier is widely regarded as the simplest way to reduce the burden of business rates. The current level of 51 per cent of rateable value could possibly be cut to the 1990 level of about 35 per cent.

Business rates vs online tax

Taxing online sales and cutting the multiplier would greatly benefit retailers such as Primark, Aldi and B&M, which do not sell online but have large store estates.

It would hit online-only groups hard. Amazon’s UK sales of about £19bn in 2020 would attract tax of £380m at 2 per cent — many times the estimated £19m reduction in its rates bill.

An online sales tax would also hurt high street chains that have developed strong ecommerce offerings, especially after the Covid-19 pandemic helped drive online sales sharply higher at many retailers. Ecommerce now represents more than 60 per cent of John Lewis’s revenue, for instance, compared with 40 per cent before the virus.

Next’s annual business rates bill would drop from about £115m to £80m if the multiplier were reduced to 35 per cent. But a 2 per cent tax on its online sales — £2.15bn last year — would more than cancel out that saving.

Dixons Carphone would also see any savings from a business rates reduction cancelled out by a 2 per cent tax on online sales, even at pre-pandemic levels. The same is true of John Lewis.

An Amazon distribution depot north of London. The pandemic has seen a rise in online sales © Adrian Dennis/AFP/Getty Images

The estimates slightly understate the value of rate reductions because the FT has used retailers’ public statements regarding the value of business rates relief as a proxy for their overall rates bill. In reality, rates relief applies only to retail premises whereas a multiplier reduction would cover head offices and warehouses as well.

In the case of Dixons and Next, they also overstate sales by including some overseas revenue, because the companies do not disclose UK online sales in isolation.

But the companies highlighted have seen the FT’s calculations and have not disputed the conclusions. They declined to comment further.

The varying impact of an online sales tax explains why the industry is starkly divided about the merits of imposing one.

Supermarket group Tesco has suggested a 1 per cent levy, while Marks and Spencer has advocated increasing corporation tax to fund a cut in business rates. Next chief executive Simon Wolfson wants higher business rates applied to the warehouses that online-only players depend upon.

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