New e-commerce taxes might help refill government coffers, but the knock-on effects are a lot more complicated - and dangerous

When the national debt has soared over £2 trillion and the budget deficit is set to hit £400 billion this year, inevitably government thoughts are going to turn to how to pay this off - and who gets landed with the bill. In the case of the UK, there’s a good chance that will, in part, be the e-commerce sector, an easy target to hit, albeit a move that could have unintended consequences.  

But as he prepares to deliver the country’s latest Budget statement on Wednesday, the challenge facing the UK government’s finance chief, Chancellor of the Exchequer Rishi Sunak, is that with political commitments not to raise rates of income tax and VAT, he is left looking for fresh sources of revenue after a year in which COVID-19 forced his hand in terms of spending, including items such as a business rates holiday for bricks-and-mortar operations and the high cost of furloughing British workers. 

All of that was unplanned and unavoidable and won him some political points during the height of the pandemic crisis. But now it’s payback time and although the virus crisis isn’t yet over, there are enough signs of hope with the vaccine programs to contemplate what lies on the other side of lockdown - and who’s going to be asked to pay for the past year’s over-expenditure. 

One popular notion for several months has been the imposition of a one-off windfall tax on those businesses that have ‘had a good war’ and seen their revenues soar. Primarily here we’re talking about online retailers which saw demand rocket as non-essential stores shuttered for the duration and people were told to stay at home as much as possible, limiting even visits to essential retailers, for food and medical items, to the bare minimum. 

The end result was the frustration of loading and re-loading online grocery website home pages in the vague hope of somehow ending up better than being customer number 238,319 in line to place an order for a delivery slot that was probably three weeks away anyway.  As initial supply chain management wrinkles were ironed out, the shift to online retail was significant with pureplays reporting record revenue rises and physical rivals seeing rapid acceleration to a bricks-and-clicks business norm. 

Proponents of a windfall tax argue that COVID has been an unintended boon for online firms and that the Treasury ought to be eyeing up the unexpected increase in their revenues. It’s a tempting enough thesis when it’s noted that Amazon, already under fire for allegedly not paying its fair share of local tax, saw its UK sales soar 51% year-on-year to $26.5 billion on 2020. Rake in a couple of percentage points of that and the coffers would get a timely boost. 

That doesn’t now appear to be on the cards however. The UK, in common with a number of other countries, already operates a Digital Services Tax of 2% of local revenues when a business’s worldwide revenues from digital activities are more than £500 million and more than £25 million of these revenues are derived from UK users. That was introduced last year in the absence of progress towards a global consensus by the OECD. 

What now looks more likely is a new tax on online deliveries, a twist that would still tap into the digital retail boom and also have the added political bonus points of being able to be spun as a green tax. But such a move would have its own negative consequences. 

The no right answer question

Whatever Sunak decides to do, it won’t end the ongoing debate about how to level the playing field between online and offline retail businesses. Late last month, 18 retail bosses, including the CEOs of Tesco, Morrisons, Asda and Waterstones, wrote to the Chancellor to demand a permanent reduction in business rates, stating: 

Reducing business rates for retailers and rebalancing the tax system to ensure online retailers pay a fair share of tax would be revenue-neutral, provide a vital boost to bricks and mortar retailers and support communities in need of levelling up.

But retailers are themselves divided on the best course of action. Tesco’s management team has made no secret of its desire to see a one percent online sales levy on businesses with annual revenues in excess of £1 million, but NEXT CEO Lord Wolfson opposes such an approach on the basis that major retailers will simply pass the cost back to consumers, as Amazon has done to UK users in response to the Digital Services Tax.  

The same risk exists with what’s currently understood to make up the online delivery tax idea. With many people still dependent on multiple deliveries from various sources on a daily basis, the additional costs could soon mount up for customers, particularly impacting those at the lower end of the economic scale. Such individuals might find themselves baulking at the additional delivery charges and decide it’s a better idea to go out to the shops themselves, undermining in the process the Government’s own COVID prevention exhortations not to go out any more than necessary.  

As KPMG’s Head of International Tax and Tax Policy, Melissa Geiger, notes: 

It is probable that any online tax would be passed onto consumers rather than being borne by the retailer. The Chancellor may feel that such a move might help rejuvenate the High Street as an alternative to online shopping as the economy begins to reopen following COVID. However, it is likely that something more comprehensive will be needed to help the High Street.

An online delivery tax won’t just impact retailers either; the Deliveroos and JustEats and other takeaway delivery firms, who’ve also ‘had a good war’ during the pandemic, will also be on the receiving end of extra costs and are equally likely to pass them on. And the same ‘COVID-safer’ argument applies - if customers are going to have to pay extra to have their fish and chips safely delivered to the front door, a good many people may well decide to go and stand in line at the takeaway outlet instead. 

Size doesn't matter 

There would also be other casualties and collateral damage. It’s not for nothing that windfall tax proponents talk about an ‘Amazon tax’, the misconception here being that the targets of such a move will be the retail rapacious US behemoths. In reality,  a delivery tax would hit small businesses as well, arguably more as they lack the negotiating power and economies of scale strengths of their larger counterparts when it comes to striking deals with carriers. 

The ‘hybrid’ retailers would also be hit hard. While there are retailers that still have no direct online operations, such as Primark, the COVID crisis saw a rapid acceleration of digitally-enabled fulfillment, such as click-and-collect schemes, and an uptick in delivery options. While those stores may have benefitted from the business rates holiday, that is going to come to an end sooner or later.  If those costs return and are then added to by an online delivery tax then, working on the assumption that there won’t be a wholesale return to pre-COVID in-store shopping, those new-born bricks-and-clicks retailers are now looking at increased costs at a time when their industry is already in turmoil.

The other challenge here is a wider, pretty basic one that diginomica has noted before - e-commerce often just isn’t profitable for retailers anyway. Walmart, the world’s largest retail brand, doesn’t make a profit from online sales and is still working towards reducing its losses there. COVID has forced the omni-channel transformation hand of many retailers and in the long term this may be a good thing, but in the short term, it’s added new cost pressures and demand on resources at a time when the British Retail Consortium estimates that lockdown has cost the non-food store-based retail sector over £22 billion in lost sales.

My take

Chancellor Sunak needs to be very, very careful what he does here.