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Some of Europe's brightest legal minds look at the tax issues across Europe which could impact multinational businesses.

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Exploring the pros and cons of an online sales tax

It is clear from the recent HM Treasury consultation document that an online sales tax (OST) applied to certain sales to UK customers would be a very complex measure, even though its aim of levelling the playing field between retailers operating on the high street and those operating online seems simple enough. It remains to be seen whether there is any appetite for yet another complex tax and what would prevent the OST from being counted as a “similar measure” to the digital services taxes (DSTs) prohibited under international tax reform proposals.

What problem is the OST supposed to solve?

Retailers operating from valuable retail premises, for example, high street shops, have to pay higher business rates than their online competitors operating a business model with lower commercial rents and lower business rate burdens. The intention is that an OST would help rebalance the taxation of the retail sector. 

You might ask whether a better (and simpler) option would be to abolish business rates across the board? On the face of it, that sounds appealing, but it was ruled out in the recent report on the review of business rates. It was concluded that business rates, raising over £25bn a year in England, are necessary to fund vital local services and there is no alternative with widespread support that would raise sufficient revenue to replace them. Instead, the intention is that an OST at a low rate would fund business rates relief for the retail sector in England and fund the block grants to the devolved administrations. The business rates review promised a consultation on the case for and against an OST, so here we are.


The number of questions raised in the consultation highlights how tricky it will be to design the tax and to define the necessary terms. Even the starting point of how you distinguish between online and offline activity raises complex issues. For example, should the definition of online sales include all remote sales or only internet-mediated sales? Then which goods and services should be in-scope and what about digital equivalents of physical goods (e.g. e-books) and online media services?

Once the scope is determined, it would have to be decided what thresholds or allowances should apply and whether any exemptions are appropriate, such as for “click and collect” purchases, or for certain goods or services. The more exemptions there are, the harder it would be for both the government and businesses to administer.

It is clear from the consultation that the government is minded to limit the OST to sales made to household consumers rather than applying it also to business to business (B2B) transactions. This is partly because of the lack of connection between online B2B sales and the objectives of an OST. In addition, any OST incurred by businesses would likely be passed on and there would be potential for multiple layers of taxation to occur in supply chains which would create wider economic distortions.

It is not even simple to determine who should be liable for the OST. From the starting point that it should be the seller not the consumer who is liable for the tax, other players such as online marketplaces or intermediaries may sometimes need to be liable for the OST or be involved in assisting in its administration and collection, for example where the seller is overseas.

How does this fit in with the digital services tax and international tax reform?

The government is keen to present the OST as a completely separate beast from the UK’s DST which is a tax on revenues from certain digital services including social media, search engines and online market places. Under the agreement on international tax reform reached on 8 October 2021, the UK has agreed to remove the DST once the new taxing right and profit allocation to market jurisdictions (Amount A under Pillar 1 of the international tax agreement) is in place and not to introduce any new “relevant similar measures”.

The government will have to ensure that an OST would not fall within the definition (still to be agreed) of “relevant similar measures”. I am not convinced that tying the OST to a reduction of business rates for retailers, or labelling it as a sales tax, will be enough to convince the US, in particular, that the OST is not a “similar measure” to a DST when it will be a revenue-based tax which will apply to in-scope sales to UK customers regardless of where the seller is based. 

If an OST were adopted, its design would not be straightforward.


slaughterandmay, zandrews, digital services tax, online sales tax, business rates, international tax reform