The Government is considering the introduction of a new online sales tax (OST) to "rebalance" the taxation of online and in-store retail businesses.

On 25 February 2022 the Treasury published a consultation seeking several answers about an OST, including what form it should take and how an online sale should be defined.

If implemented, the Government would use an OST to reduce the business rates of retailers with properties in England and fund the block grants of the devolved administrations.

OST proponents say in-store retailers pay a disproportionate share of business rates, making brick-and-mortar businesses less competitive.

However, critics say an OST is a misplaced tool to help high street businesses, as the convenience of online purchases may partly explain the struggles of brick-and-mortar retailers.

As a proportion of all retail sales, online shopping rose from around 3% in 2006 to about 22% in March 2020.

The pandemic accelerated the trend in the UK, with online business accounting for 29.6% of all sales in December 2020 while not facing an equivalent to business rates.

Impacts of an OST

Business rates are charged on most non-domestic properties such as shops, warehouses and offices.

In Autumn Budget 2021, the Treasury announced a range of support and relief for businesses liable for business rates, but some still say the tax is too onerous.

The Treasury has said an OTS would not be intended to encourage customers to shop in-store, but as a way to fund business rate reductions.

An estimate of achievable revenue is therefore required, but a plan of the scope, rate and design of an online tax is needed first.

According to the Treasury, a revenue-based OST with a £2 million allowance levied at 1% on online sales of goods would raise £1 billion per annum.

Business rates raise around £25bn per annum in England, hence why the Government does not intend to use an OTS to abolish them.


Mike Cherry, national chairman of the Federation of Small Businesses, said the tax must come hand in hand with business rates reform.

He said:

"Efforts to level up the tax playing field between corporates that mostly operate online, paying low business rates on out-of-town warehouses, and community small businesses, which are up against high rates on high streets, are to be encouraged.

"But the Government must avoid simply adding further cost pressures to small firms that have increased their online presence to keep the show on the road over lockdowns."

Len Shackleton, editorial and research fellow at the right-wing Institute of Economic Affairs said the tax would complicate the tax system, adding:

"It would also penalise a new form of commerce which benefits the consumer".

The Chartered Institute of Taxation (CIOT) said an online sales tax risks shifting the tax burden from landlords to shoppers if online retailers increased prices to counter a new tax.

Consultation questions

The consultation is open to stakeholders, who can write their views on a preformatted response form and submit them by email or post.

There are 31 questions in total, encompassing everything from what should define an online taxable sale to exemptions and questions about ensuring compliance.

John Cullinaine, director of public policy at the CIOT, said:

"We welcome the fact that the Government is consulting on this as opposed to simply going ahead with a new online sales tax, especially given its impact potentially on millions of people."

The Government has emphasised it has not yet decided whether to progress with a tax on online sales.

The consultation will be open for twelve weeks, closing on 20 May 2022.

Get in touch to talk about your business rates or the implication an OTS might have on your business.