Could a two tier VAT system save the high street?

High street
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The high street’s troubles are well documented at this point. Stores have closed, jobs have been lost and businesses have gone bust, the decline seems terminal. But according to one group, a two-tier tax system could stop the bleeding.

Colliers International, one of the UK's largest property consultancies wants a two tier VAT system. Under the proposal, shoppers would pay tax at 15% in a brick-and-mortar store and 22.5 % for online purchases.

The suggestion isn’t entirely from left field. The chancellor Philip Hammond recently told Sky News he’s considering a special retail tax - dubbed an ‘Amazon tax’ - on online retailers.

"We want to ensure that taxation is fair between businesses doing business the traditional way and those doing business online," he said in the Sky News interview. "That requires us to renegotiate international tax treaties because many of the big online businesses are international companies.”

Adapting the VAT system could be a powerful vehicle to achieve this, according to Paul Souber, Colliers’ head of London retail. It would present a strong incentive for shoppers to return to the high street and online retailers to lease physical stores.

But Souber and Colliers’ plan isn’t as simple as it sounds, according to David Wilson and Andrew Hubbard of RSM. “Artificial distinctions to address a particular policy agenda generally don’t work,” they wrote.

“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.”

VAT is structured, ultimately, to be paid 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.

“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.”

As we’ve covered on AccountingWEB before, simply blaming online retail for the high street’s woes is simplistic. Inertia and a failure to address the drag of legacy real estate has created its share of the trouble, too. To paraphrase, the retail analyst Richard Hyman: an ‘Amazon Tax’ might dull the pain - but will it create better retailers?

About Francois Badenhorst


I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 


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13th Sep 2018 09:06

It would complicated things and I support the death of the high street anyway and the properties used for housing (as shopping is a pretty awful experience and on line shopping is wondeful!)

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13th Sep 2018 09:52

That a dumb idea

The main reason its expensive on the high street is business rates and rents.

One assumes the "property consultants" are fully aware of that and trying to avoid the plain truth as it affects their client and so their commissions.

If "the powers that be" seem for reasons I personally cant fathom that town centre retail = a good thing (I hate it myself) then they need to force down rents and reduce business rates that would make a lot more busineses viable.

But fundamentally I don't really see the attraction myself of shopping on the high street. Its a very old fashioned view of prosperity, for for us involves a 20 drive drive, and expensive car park, a park and ride bus (also expensive), all to buy the same stuff I could have bought at home in a few minutes. I do a once a year (at most) clothes shop, and that's it.

The world has moved on, you don't need tax to prop it up for the sake of some old fogies who will probably be in a care home inside of 10 years.

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13th Sep 2018 10:17

In my view high street problems as they are are becuase shops and shopkeppers have not changed. Is an internet based business does not it soon fails but we dont see it like a closed shop.

When one sees stores such as Primark Sports Direct and many others prospering it cant be all bad news.

A fair chunk of any blame is to be laid at local council doors and this has nothing to do with vat or business rates -its to do with looking forward inc not hitting shoppers with increasing the cost of parking, making it difficult to drive to centre of town and making public transfort effective.

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13th Sep 2018 10:35

A 2 tier vat system will not work (we had it once with "luxury" goods) and anyway that is not what is killing the High Street (high rent and rates, no parking, fines for unloading, traffic wardens, to name but a few).
There are many people that like to shop off line. High Street or shopping Mall.
The reason why the likes of Amazon can sell cheaply is that they don't have the overheads nor heavy tax bills.
The problem is that our tax system has, since the Gordon Brown days, been destroying the small business (I shudder to think how many MTD will destroy). You can compare it with house prices. As house prices go up and lenders want everything to be squeaky clean, the ordinary person makes way for the large business. So there is a point to be made about bulldozing the High Street and creating affordable housing in its place. Perhaps the answer is to experiment with a place that is really run down and go from there.

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By Tornado
13th Sep 2018 11:02

I don't think this would work, but the significance of the suggestion should not be overlooked which is that once we leave the EU, we will have the power to do what we like with VAT to suit our own purposes, and not be restricted by the one-size-fits-all policy of the EU.

Perhaps this idea may not work, but at least we have the opportunity to explore others that might work well for this country.

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to Tornado
13th Sep 2018 12:12

What on earth does the EU have to do with any of this?

The EU does not set our VAT rates.

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13th Sep 2018 11:18

With the greatest of respect, I believe the other commenters are talking utter nonsense.

There are major structural problems with online shopping that are almost at tipping-point. Take customer returns, for instance. A combination of competitive forces, EU and UK regulations and laws has created a "ticking time bomb" around returns, especially in areas such as apparel.

Environmental regulations could be the final nail in the coffin.

In online apparel, returns rates (due in no small part to the lack of changing-rooms in the virtual world) are hitting 30-40% if not higher. Meanwhile with margins so tight, those returned items (in many cases) end up not back on the shelves for re-sale (too expensive, too risky), but instead in landfill.

Landfill? Yes, because the market for second-hand (even if in essence unused) clothing has collapsed. Whereas £350 / tonne was achievable in times past, no more.

Electrical goods are even worse - there is almost no market for those customer returns beyond landfill.

As regards the High Street, I struggle to see where the social and community cohesion that many of us would like to see can be achieved without vibrant town centres. We are an ever-more urbanised nation.

If you take a look at our European cousins, you will see retail sectors that continue to do well.

Property prices are the tail that wags the dog in the UK. Not just in terms of High Street rents, but in terms of overblown housing costs (and attendant debt) that has squeezed disposable incomes.

When the median family is dependent upon state benefits in order to pay rent or mortgage, one can see to what degree the system is "propped up."

What to do? Some of the things I favour right now are pretty radical. Legislate away upwards-only rent reviews. Legislate away LTV-based penalties from lenders. Legislate away foreign residential property ownership. Grant a right to buy for commercial tenants. Mandate registration of all leases. Replace business rates with a straightforward uplift in the VAT rate to 22% (coupled with the reduction in collection costs, that could completely replace business rates). Scrap any permitted developments to allow conversion of A1 premises to other uses. Post-Brexit (assuming it happens) mandate that all online sales into the UK are charged UK VAT.

That would be a start. There would be pain, for sure, but there will be pain in any case - at least this way we get to control when and where and how and decide how we would like to mitigate it.

Or we can watch a death spiral unfold, because this crisis is not of the High Street per se but of a retail (and a wider economy) presided-over by people who seem entirely focused on maintaining paper property values at all costs and are prepared to sacrifice the next 30 years' economic prosperity upon that altar.

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to skwdenyer
13th Sep 2018 12:22

The problem is you seem to see "the high street" as some sort of barometer for that community.

That is a very old fashioned way of looking at things and why local councils try and fail to do anything about the huge structural changes in shopping that the internet is finally bringing about, 20 years after it got going.

Its going from a place primarily to shop to a place to eat and drink and be entertained, with a bit of retail clinging on at the sides. I think a lot of the 60's+ people who run councils dont go out at night and don't see many town centres are might be empty at 3pm on a saturday, but packed by 9pm.

Retail is hugely over catered for, and needs to be more than halved in most areas and concentrated in accessible areas, rather than spread out over vast outdated areas which their target audience (pre-internet people) struggle to hobble around.

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to skwdenyer
13th Sep 2018 12:32

Great respect and utter nonsense is a contradiction just like the rest of your post.
More people in work now so less dependant on state benefits (admitted the poor are getting poorer that's mainly because [***] and booze have gone up (I'm not talking about pensioners)).
Return rates will always be high (just ask Littlewoods and the like) but going to landfill when there is money to be made - yer right.

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to johnjenkins
13th Sep 2018 16:52

johnjenkins wrote:

Great respect and utter nonsense is a contradiction just like the rest of your post.

I'm fairly comfortable respecting another's right to hold an opinion whilst considering it nonsensical.

johnjenkins wrote:
More people in work now so less dependant on state benefits (admitted the poor are getting poorer that's mainly because [***] and booze have gone up (I'm not talking about pensioners)).

Err, wow. The median family is dependent upon tax credits and other benefits in order to balance the family budget. Effectively all direct personal taxation goes to pay benefits.

Housing costs have far outstripped earnings growth. The only thing propping it all up are benefits (tax credits are benefits).

It is fashionable to think of benefits being something that are given only to "the poor" but "the poor" (by your definition) now includes "Mr & Mrs Average"...

johnjenkins wrote:
Return rates will always be high (just ask Littlewoods and the like)

Returns rates for distance selling will always be high, yes. In the past, that was only a percentage of all retail sales.

Have you looked at Littlewoods' (well Shop Direct Ltd's) accounts? On the face of it, they only seem to have made money on giving credit to customers - recalling the sage comment once made about Ford Motor Co as "a bank who happen to sell cars." Returns rates are ok if you're making money on the finance. But that doesn't apply to most online retailers.

johnjenkins wrote:
but going to landfill when there is money to be made - yer right.

If you'd like to take this further, I'm sure we can find some examples of the cost of processing returns, the cost of checking items for compliance, repackaging, restocking and so on. In large sections of retail it simple doesn't happen. Who is going to PAT test a returned Kettle? Who is going to launder and re-process a returned shirt?

There *used* to be a little money in returns (selling pallets of mixed returned electrical to eBay sellers, or mixed clothing by the tonne to recyclers), but those markets have become much harder to deal with. Again, there's a great deal of discussion about this issue elsewhere.

Anyhow, on the rest of my points I'm sure we can just agreed to differ - like I say, I can respect somebody's *right* to hold a different opinion, even if I don't agree with it.

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to skwdenyer
14th Sep 2018 09:15

Whether you're comfortable or not it's still a contradiction.
I said less people are on benefits. The fact that benefits have gone up is irrelevant.
The main reason for catalogue (now online) selling was that people could pay weekly. (I bought my first suite from Littlewoods). These days you pay upfront (most people have more disposable income).
I have a client who buys from online retailers and sells on as secondhand, so landfill, definitely a nono.
Respecting a "right" to hold an opinion is meaningless.

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to skwdenyer
14th Sep 2018 23:25

Your quotes in inverted commas as not good at line by line quoting on here.

skwdenyer wrote:

"What to do? Some of the things I favour right now are pretty radical."

" Legislate away upwards-only rent reviews."

Why? Whilst for some properties it may be an issue for a lot of secondary/tertiary it is a red herring, there is no rent review because lease terms are these days more likely to be 3-5 years with no rent reviews. Also RPI leases re larger properties are far more common these days than previously.

"Legislate away LTV-based penalties from lenders. "

Whilst I should love this it would be the kiss of death re lending on commercial property (we already have had the likes of Nationwide close their commercial property lending division) The lenders will just lend to other sectors.

"Legislate away foreign residential property ownership."

No comment

" Grant a right to buy for commercial tenants. "

Great, so the biggest site we own which is an old factory building we converted into multiple use (workshops, retail, offices, studios) with circa 50 different tenants, gets its ownership carved up, with all the tricky bits re common access stairs, services, repairs spread out post event and it is then pretty much incapable of being further changed to meet market need as ownership is so wide nothing ever gets agreed without a CPO.

"Mandate registration of all leases. "

A lot of small leases we do as licences, my lowest annual commercial property licence is £600 p.a (a small room). If I need to register this all the small craft business entities we support with very small premises are just not getting space from us, there would not be an economic value having to register one year licences at low rental levels. Whilst we write licences in house we would need to pay for each lease. This is space that was a 7,000 sq ft single office another 4,000 sq ft office and a 2,000 sq ft office that we converted down to various size small units to meet market demand.

"Replace business rates with a straightforward uplift in the VAT rate to 22% (coupled with the reduction in collection costs, that could completely replace business rates)."

And the small traders who get 100% business rates relief, what about them, I have at least four vat registered retailer clients who currently pay no rates, you just squeezed their margins with the extra vat.

"Scrap any permitted developments to allow conversion of A1 premises to other uses. "

Why not let the market decide, if rents drop / property becomes hard to lease premises do change use, I have over my career dealt with planning for well over 250 residential units, all involved brownfield development/conversion from a bottling plant, whisky bonds and an old print works. We currently have another 2-3 properties that at some time, when their current economic use is spent, will likely go the same way, whether by my hand or my eventual successors.

This happens all the time, the old B & Q site at Warriston, Edinburgh, is becoming this;

Groundworks started earlier this year

"Or we can watch a death spiral unfold, because this crisis is not of the High Street per se but of a retail (and a wider economy) presided-over by people who seem entirely focused on maintaining paper property values at all costs and are prepared to sacrifice the next 30 years' economic prosperity upon that altar"

There are issues but throwing out the baby with the bath water is not the approach, we need to keep some business activities in cities or we will develop further transport issues re those needing to get to work to the outer city ring where all the business premises will remain as the centre becomes flats, bars , hotels etc; everybody who works in other activities will need to travel to work.

Luckily for the UK my daughter has just started her Msc in Town Planning, given she is a natural at Sim City in ten years or so I will have given the UK its next planning Czar, and it will be a great environmentally friendly UK as her first degree was Sustainable Development.

I work for a property company that operates in Edinburgh in the secondary/tertiary part of the market, if you just let us get on with what we know how to do you will, by the invisible hand of the market, get solutions (Subject to some overarching planning frameworks)


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By Zigurds
13th Sep 2018 12:47

I agree that using VAT is entirely the wrong answer. In any case, it would (still) require amendments to the EU VAT Directive.

Yes, many high-street retailers need to refresh and update their offering, but the elephant in the room is business rates. This is a tax that is now wholly unfit for purpose. It should be replaced by a land value tax and/or a turnover-based retail sales tax.

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to Zigurds
13th Sep 2018 14:24

Let's just take a small hairdresser that employs say 2 people. They are taxed out of existence.
Rent, Rates (and they have to pay extra for waste disposal), VAT, ERS NIC, Unpaid Tax Collector and the associated paperwork, RTI, AE, and wait for it the piece de resistance (don't know where the accents are) MTD.

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to johnjenkins
14th Sep 2018 23:30

Small business rates relief may have them pay no rates currently, well certainly in Scotland, no idea what schemes you have down south.

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13th Sep 2018 16:41

Retail is moving out of town and online. Successful retailers have recognised this and changed their business accordingly. If the High Street can't compete it should close.
Can anyone think of any problem to which increasing tax complexity is the answer?

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to Knight Rider
14th Sep 2018 23:40

Fine if other business entities occupy the space providing alternative employment, but if all city centres become housing congestion re this workforce flowing out to large business parks in the outer city and returning home every evening will make road congestion even worse.

There is a finite limit to how many coffee shop, bars etc we need in our cities.

Could have them all become offices, I would quite fancy an office in Princes Street with the views of the Castle, but generally happy communities have a mix.

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20th Sep 2018 11:00

DJKL - As a previous poster has said the high street has to change. What was good when I was a boy does not work today. One can blame Amazon or anyone else but the decline started before Amazon came on the scene.

The major problem is that shops only prosper if they have sufficient trade. That means people using the shops Monday-Saturday all day. In our local town like many others offices moved out and thus there is insufficient thru put of customers to support shops.

As I said earlier you need to look at what local councils have achieved. Double yellow lines, expensive or very little parking and shutting of roads. All contribute to offices etc moving out of town. Business Rates are blamed as is the internet but there are many sucessful stores on the high street so there is a collection of things that are causing the high street to fail.

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