The Shorthand – should we fear an online sales tax?

Welcome to this week's edition of The Shorthand, your weekly digest of the top news stories that affect small businesses in the UK! Here, we break down the stories you may have missed during the week, detailing what they’re all about and, more importantly, why you should care.

And all that in under 5 minutes.

Go on, put the kettle on and we’ll have you caught up with the most pressing business news stories of the week by the time you’ve finished a cup of tea.

1. Confidence rises for freelancers and small businesses

What’s happening here?

Let’s start with some positive small business news this week. UK companies’ fear of business failure has dropped noticeably since early 2021, with 5.7% at risk of failure this year, compared to 15% early last year. Analysis of ONS data by the London School of Economics (LSE) shows that it is smaller businesses (those with 50 employees or fewer) that are driving this rise in confidence and a more positive outlook.

This comes at the same time as research by the Association of Independent Professionals and the Self Employed (IPSE) that indicates that freelancers’ confidence in their own businesses has risen significantly since the final quarter of 2021. Last autumn, freelancer confidence was indexed at -11.0, and this rose to +2.2 in the first quarter of 2022. This is the first return to positive figures for measuring self-employed confidence for a full year.

Why should you care?

In economically uncertain and challenging times, with inflation rising to record levels, spiking energy prices and supply chain uncertainty due to war in Europe, news of optimism in the business community should be welcomed.

However, while the risk of business failure has fallen sharply since early 2021, small enterprises are not out of the woods yet. A successful vaccine rollout and the removal of Covid restrictions have given small businesses a major boost over the last year, but the range of challenges facing companies is still perilous.

Ultimately, this news should be greeted with cautious optimism, as for all of the current challenges that small businesses face, this data suggests that small enterprises have fared impressively well since the pandemic.

2. Will an online sales tax harm small businesses?

What’s happening here?

Back in February 2022, the UK government launched a consultation around the introduction of an online sales tax (OST), aimed at closing the gap in operating costs between physical, bricks and mortar shops and e-commerce businesses, potentially allowing for cuts to business rates.

The potential new tax, based loosely on India’s ‘equalisation levy’, could be as high as 2% of the sales value of a product or service and apply to anything sold online to UK customers.

Now that the consultation phase is over, major businesses are offering their opinions on the proposition, with retail giants such as Tesco, Sainsbury’s, Co-op, Morrisons and Waterstones supporting the idea. This week, e-commerce giants Amazon and eBay warned that the OST would “crush” small businesses.

A proposed new sales tax would target e-commerce transactions.

Why should you care?

In an increasingly digitised economy, many, many small businesses would be affected by the introduction of an online sales tax. Unsurprisingly, large physical retailers like Tesco and Morrisons welcome the proposition, but major players in the online sales world are unhappy. The warning from Jeff Bezos’ Amazon is stark; the 300,000 small businesses that sell their goods through the e-commerce giant would have to swallow the cost of the new levy, cut their margins, or pass the cost onto consumers, making them less competitive.

However, for physical retailers operating on the nation’s struggling high streets, this new levy would potentially be a major boost in the fight to keep physical retail spaces alive. If the revenue collected from the OST meant that business rates could be cut for shops, then this would present a great opportunity for smaller businesses to invest in physical retail space, breathing new life into town centers around the UK.

3. Small businesses urged to slash prices in the face of inflation

What’s happening here?

10 Downing Street’s new Cost of Living Tsar, David Buttress, has announced in a speech to the Confederation of British Industry (CBI) that the government will encourage businesses to cut prices to help ease the cost of living crisis affecting consumers.

The government also confirmed that there will be no subsidy from the treasury to support this price cutting scheme. There will, however, be a taxpayer-funded advertising campaign launched in early July to promote the price-cutting effort, with businesses that slash prices allowed to use the government-approved campaign branding on their marketing.

Some have compared this to the government’s ‘Eat Out To Help Out’ initiative in 2020 to help the hospitality sector during the Covid-19 pandemic, however, this latest campaign will not be subsidised in the same way, meaning that businesses must swallow the cost of cutting their prices themselves.

Why should you care?

Clearly with a cost of living crisis raging in the UK, something needs to be done to ease the burden on consumers. However, this latest announcement has been met with skepticism from small business groups who say that the expectation that small firms will slash prices without government support is unachievable.

Martin McTague, national chair of the FSB , commented that small businesses are:

Well beyond the point of being able to absorb extra costs without passing them on (to customers). Asking this group to soak up additional costs just isn't realistic, especially when so many are worried about basic survival, and have already cut all expenses, even necessary ones, to the bone.

Ultimately, this directly affects small businesses because of the more limited ability of small firms to squeeze their margins and drop their prices compared to their larger, more established counterparts.