It was announced in Autumn Statement 2022 that the government would not proceed with the introduction of an Online Sales Tax (OST). HM Treasury's newly published response to its earlier consultation reveals why the proposed new tax was rejected.

HM Treasury’s Consultation on the proposed Online Sales Tax (OST) ran from February to May 2022.

The OST was presented as an idea to rebalance the difference between the online and high-street retail sectors by being used as 'a tool' to fund business rates relief for the high street.

Encouraging consumers to shop in-store rather than online was not considered an objective of the proposed OST.

The consultation received some 3,037 written responses, and several themes emerged:

  • A large majority expressed concerns about business rates and felt that the retail sector was being highly taxed compared to other industries.
  • A minority felt that long-term business rate reliefs were essential and would be open to an OST if it could enable that.
    • There was almost no support for an OST as a standalone policy.
  • There was no consensus on how to define an online sale for the purposes of an OST.
    • This was particularly difficult where retailers had both an online and offline presence.
    • In many cases, customers may have received in-store support and advice before ultimately completing a transaction online.
    • ‘Click and collect’ models presented further challenges with no unity of views.
  • Respondents disagreed as to the scope of an OST, particularly whether it should apply to both goods and services.
  • An overwhelming majority agreed that an OST should not give rise to an economic cost in relation to transactions between businesses (i.e. B2B sales).
    • There was no agreement on how this could be achieved in a proportionate and administrable manner.
  • Many respondents were concerned about the complexity of an OST, particularly given the existing burdens on the retail sector.
  • A rate of OST of 1%-2% was generally suggested.
    • Concerns were raised that given the low proposed rate of the tax, the compliance costs would be disproportionate when compared to the tax due.
  • Some considered that an OST should be introduced as part of the VAT system.
  • There was concern that an OST would be passed on to consumers, increasing inflation and worsening the cost of living pressures, particularly for vulnerable groups who may rely on online retail.

Following feedback from stakeholders, the government Announced in November 2022 that it would not proceed with an OST. The reasons given in the consultation response include:

  • The proposal not having widespread support from the retail sector or members of the public.
  • Even less pronounced support when considering the various different forms of OST under discussion.
  • The balance of responses suggesting that an OST would be complex, distortive, and would not raise sufficient revenue to fund the scale of business rate relief stakeholders have called for.
    • Post-revaluation, retail business rates will raise about £6.7 billion per annum in England.
    • Initial estimates suggested that an OST could only raise approximately £1 billion per annum in the near term.
    • Respondents felt that this would not raise enough funding to provide sufficient business rates relief to all retailers with physical stores.

Supporters of an OST viewed it as an alternative way of delivering reforms to the Business rates system. The government states that it is committed to delivering the reforms announced at the conclusion of the Business Rates Review.

As announced in Autumn Statement 2022, the 2023 business rates revaluation will go ahead.

From 1 April 2023, business rates bills will be updated to reflect changes in property values since the last revaluation in 2017, which was based on property values in 2015.

Total business rates paid by the retail sector are estimated to fall by 20% but will rise 27% for large distribution warehouses. This is intended to address concerns about the imbalance of taxation between in-store and online retail.

To support businesses adjusting to their new bills at the 2023 business rates revaluation measures include:

  • A freeze to the multiplier for 2023-24.
  • An extended and increased retail, hospitality, and leisure relief for 2023-24.
  • Transitional Relief scheme over the next three years.
  • Scrapping ‘downwards caps,’ which restricted falls in bills at previous revaluations.

Useful guides on this topic

Business Rates: What's new?
The government is exploring different methods for the reform of business rates. Proposals, including three-year rating valuations, have been set out in several different consultations and are examined below.

Online Sales Tax consultation
In February 2022, HM Treasury published 'Online sales tax: Assessing an option to help rebalance taxation of the retail sector'. It asks whether using indirect taxation is a viable alternative to business rates.

A beginner's guide to VAT
VAT: Where do I start? What is VAT? Who has to register for VAT? What rate should you charge? How do you calculate VAT? When are your VAT filing obligations?

Autumn Statement: Business rates
In his Autumn Statement 2022, the Chancellor, Jeremy Hunt announced changes to business rates to further support businesses and the high street over the next five years and the scrapping of proposals to introduce an online sales tax.

External link

Consultation outcome: Online Sales Tax: Policy Consultation

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