The UK government is in talks regarding the potential implementation of an online sales tax. This comes amid a wider review of the future of business rates following a current year-long relief.

It is believed that an online sales tax could help to halt the collapse of the high street. However, for already hard-hit retailers the introduction of such a tax could cause a huge rise in costs.

Tax may be used to reduce business rates

Business rates, which are currently under a year-long relief, are being reviewed by The Treasury. While the relief from the tax looks set to be extended in the short-term, there have been calls for a reduction of such rates in the long term.

The introduction of a tax of around 2% on e-commerce is reportedly being considered. The proceeds could then potentially be used to reduce business rates.

While retailers have long regarded business rates as excessive and unfair, this potential move is being widely criticized.

Online sales tax could hit high street retailers hard

In these pandemic hit times, online retail has become increasingly important to UK retailers. With the closure of non-essential stores, e-commerce has been relied upon to keep many businesses afloat.

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By GlobalData

MarketLine estimates that online retail grew by over 45% in 2020 to reach £72.3bn. This rise in online spending has accelerated an already rapid shift towards e-commerce and is likely to be a lasting legacy of Covid-19.

A tax on e-commerce would benefit those retailers with a large store network and no online presence, such as Primark, B&M and Aldi. It is also regarded as creating a fairer playing field when it comes to e-commerce giant Amazon.

Amazon’s UK sales reached around £19bn in 2020, which would result in tax of around £380m at 2%.

However, The British Retail Consortium has argued that high street retailers that have developed online operations would take a severe hit. Particularly those retailers that have seen e-commerce as a lifeline during the pandemic.

John Lewis sees around 60% of its sales coming from online retail compared to 40% before Covid-19. While Next would see its business rates cut from around £115m to £80m if a reduction were implemented, a 2% tax on its online sales would mean that the retailer could potentially pay a higher tax bill.

What’s more, the introduction of such a tax would increase prices for consumers during a time of significant economic difficulty.