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Written by: David Wilson and Andrew Hubbard

David Wilson

Technical Associate Director

Different VAT rates for online and physical retailers

The Chancellor has stated that he wants ‘to ensure that taxation is fair between businesses doing business the traditional way and those doing business online’. Whatever options he may be considering for levelling the playing field between online businesses and bricks-and-mortar retailers on UK high streets, different VAT rates will not be part of that deliberation.

The very ethos of VAT is that it is charged on the ‘value added’ at each stage of the production and distribution process, including retail sale, and affords businesses in the supply chain the right to deduct the VAT paid at an earlier stage of that process from the VAT payable on the onward supply. 

As businesses in general do not suffer the burden of VAT when they buy inputs into their production processes, it can be seen that VAT is structured to be ultimately borne by the end consumer. 

If a higher VAT rate applies to online retail sales than to sales by high street retailers then, rather than levelling the playing field between the two, the additional VAT burden would result in increased costs for the consumer. 

VAT tribunals have consistently recognised that the principles of fiscal neutrality and distortion of competition preclude treating similar goods or services which are in competition with each other differently for VAT purposes. Under the law as it currently stands, applying different VAT rates to the same goods would be illegal. 

Furthermore, as click-and-collect has become a popular way for shoppers to efficiently purchase items online, then far from levelling the playing field, different VAT rates would add to businesses’ administrative burden and compliance costs. Different VAT rates would also confuse consumers, particularly where the goods ordered online are also available in-store.

Generally, differential taxation isn’t the answer. In the world of direct taxes for instance, at one time smaller companies paid a lower rate of corporation tax than larger companies, but this distinction was abolished some years ago and the system has survived very well without it. Artificial distinctions to address a particular policy agenda generally don’t work.

As VAT would not appear to be either a legally competent or administratively practicable means of levelling the playing field between the high street and online retailers, and as it's highly unlikely that the Chancellor will interfere with the business rates regime, the focus will once again fall on taxing the value generated by online businesses. Whether that will take the form of an online sales tax should become clear on Budget day. 

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