By Stephen Phillips
The Institute of Directors (IoD) – a prominent lobby group for UK businesses – is pressing for international action to levy value added tax (VAT) more vigorously on consumer-to-business e-commerce, amid fears that traditional bricks and mortar trade could be penalized by the explosion of online shopping.
The IoD which represents senior managers at 47,000 UK businesses fears ministers in London could hike VAT charges on non-e-commerce transactions from 17.5% to 25% to recoup losses from non-taxable internet transactions. E-commerce will account for up to 20% of UK shopping within the next five years leaving the government between 5bn pounds ($8.04bn) and 10bn pounds ($16.07bn) out of pocket, the IoD projects.
In the first six months of this year UK online shopping leapt by 44% to 1.5 million transactions, and spending online is forecast to rise from around 3bn pounds ($4.82bn) this year to 9.5bn pounds ($15.27bn) in 2001, according to a report by the NOP research group commissioned by the IoD.
Richard Baron, deputy head of the Policy Unit at the London-based IoD branded the proposals contained in a report entitled ‘VAT and electronic commerce’. The IoD is concerned that existing VAT rules have failed to keep pace with the growth in e-commerce. The essential nature of the problems, the IoD report says, is, a genuinely global market, which is not subject to any territorial restrictions, is growing up in a world of territorially defined nation states.
At the moment digitized goods such as music or software purchased by UK private individuals as downloads over the internet escape VAT charges. Although business purchases of such items should be liable for the tax this has not been tested by tax collecting authorities, Baron said. Physical items costing over 18 pounds ($28.93) bought over the internet are treated as ‘services’ in the UK and do attract VAT but even here the IoD believes that HM Customs & Excise, the UK tax collecting authority, will have its work cut out collecting tax on the projected volume of trade in these goods over the internet.
It fears the tax-trigger threshold may have to be raised in the UK unless Customs and Excise mounts a massive recruitment drive to cope with processing demands. The IoD is calling for consumers to account for VAT on their shopping from their computer using specialist software and it hopes for clarification of the issue within four years so suppliers have specifications to work to. It also suggests payment providers such as credit card companies manage VAT charges on online transactions.
But the proposals would see VAT proceeds netted by the buyerÆs country rather than that of the merchant, cutting across the thrust of existing legislation and the European CommissionÆs commitment to the so-called ‘origin system.’
The issue of VAT charges on internet transactions was crystallized yesterday with the announcement that UK pop star, David BowieÆs latest album will be released on the internet in the first-ever collaboration between retailers and a major record label. The record will be downloadable from around the web sites of around 50 US music retailers, including Tower Records, HMV and Virgin with the retailers setting prices themselves in a competitive market.
But as we went to press a spokesperson for London-based Virgin Music Group, which is coordinating the sale said it wasnÆt clear whether VAT charges would be levied on online sales. It’s very much an experiment with teething issues and problems, he said. International, cross-frontier coordination of tax policy is being spearheaded by the Organisation for Economic Cooperation and Development (OECD), which has dedicated several working parties to the subject. Baron said the IoD hoped for a resolution of the issue within four years.
