An online tax crackdown is a mistake

When he presents his first Budget later this month, Chancellor John Healey won’t have many ‘bash the rich’ or ‘hammer big business’ levies to cheer up his backbenchers. A stiff rise in capital gains tax has been ruled out and the threshold for the mansion tax most probably won’t be lowered. It looks likely, however, that Healey will introduce an online tax crackdown. But is there a chance this could backfire?

In the Budget, Healey is expected to announce that online marketplaces, such as Amazon, eBay and China’s Temu, will be forced to be responsible for collecting the VAT due on the products sold on their platforms. At the moment, lots of shell companies sell lots of stuff through the big web retailers, and then they are closed down again before any VAT has to be paid. The tax magically disappears. The result? Traditional retailers are undercut by online rivals, while the Treasury loses lots of money.

Forcing the platforms to collect the tax owed by any vendors selling through them is expected to raise an extra £1 billion in revenue. The money will be used to cut business rates for small shops and cafes on the high street. It might be the one big measure to help businesses, and especially smaller local businesses, in what will otherwise be a Budget characterised by what Labour politicians call ‘tough choices’ and the rest of us call ‘putting up taxes yet again’. 

There is nothing wrong with Healey’s plan in principle. The system as it stands is wide open to abuse. The trouble is, it is very hard to see it raising anything like the money the Treasury perhaps hopes it will. The online sellers, many of them based in China or India, may well find a different way around the system. And if they don’t, many of them will simply give up. Avoiding the VAT, and so making their products cheaper than anything else on the market, was their only competitive advantage. If that is gone, they will move on to the next opportunity.

There is a good chance that the Chancellor will end up spending money on cutting business rates, and the extra revenue he forecasts won’t ever materialise. It might make for a good headline on Budget day – but it will only end up making the fiscal crisis the country is heading into even worse.