An 'Amazon Tax' May Protect Giant U.K. Retailers at the Expense of Online Businesses
Tax may soon become even more taxing but entrepreneurs should prepare now.
Tax reform may not seem like the most riveting of subjects but entrepreneurs should pay attention. Tax directly affects profitability, which is at the heart of most businesses. The U.K.'s Chancellor of the Exchequer, Philip Hammond, said on Aug. 10 that he's willing to charge tax based on revenue (rather than profit) to "rebalance the playing field" between online retailers such as Amazon and traditional brick-and-mortar businesses like Sainsbury's. This comes in the wake of increasing organizational failures of former mainstays such as Toys 'R' Us and Maplin (which have gone into administration this year) and the recent last-ditch buyout of House of Fraser by Sports Direct.
While the EU has been looking at an "Amazon tax," Hammond is in favor of the U.K. introducing this temporarily until international agreements can be made. Currently within the U.K., corporation tax is charged on profit. The Amazons, Googles and Facebooks of the world have the flexibility to structure their businesses in the most advantageous way for international profit but this is a luxury many entrepreneurs cannot afford.
So, what would an "Amazon tax" mean for online businesses?
It's not entirely certain, as the government hasn't specified whether this tax would only apply to the behemoths or would cover all online businesses. U.K. tax policy has become more stringent of late. IR 35 regulations (designed to combat tax avoidance) were reformed in 2017, meaning some contractors working in the public sector are taxed as if they are employees. This can incur a burden of 25 percent of income. The government suggested that this could be expanded to the private sector in 2019.
Concerns about the amount of tax paid by global technological giants have been raised by governments for some time. In 2012, the Public Accounts Select Committee (within the U.K.'s Parliament) summoned leaders from Google and Amazon regarding tax avoidance. The Select Committee concluded that "The U.K. is a key market for Google but the enormous profit derived is out of reach of the U.K.'s tax system ... Public confidence in Google will only be restored when it establishes a corporate structure that ensures Google pays tax where it generates profit. This should be addressed as a matter of urgency by Google and other companies with a similar corporate structure -- the Committee will continue to pursue this issue over the course of the Parliament."
Advice for the prudent entrepreneur
There is a degree of uncertainty in tax policy (particularly for those in the online space) but that doesn't mean there's nothing that can be done to prepare.
1. Evaluate options for diversification within your business.
Oftentimes, an online delivery method is chosen for services because it's the cheapest way to operate. Consider your value ladder: Could you offer a service in person on a one-to-one/small group or VIP basis that has greater value to your clients and would warrant higher fees?
2. Automate, automate, automate.
If you're confined to only offering your services or goods online, it's highly likely that you can automate elements of your business to reduce the amount of time spent on routine tasks. This would mean that you could focus on getting more sales or increasing the profitability of current offerings by reducing the staff time needed to deliver for your clients. McKinsey sees this as the future, predicting that "by 2020, customers will manage 85 percent of their relationship with an enterprise without interacting with a human and 40 percent of sales activities could be automated using technology that already exists."
3. Get expert help.
Use a qualified accountant who's conversant on the trends within her field and can support you in making the best decisions for your organization. This should be seen as an investment in your business rather than merely an expense: Making the right strategic decisions will pay off significantly. If the cost is of concern, professional organizations such as the Institute of Directors and Federation of Small Businesses are likely to come out with guidance, and the former offers consultation with accounting and legal experts as part of its membership.
Most organizations don't have the resources of Amazon, but entrepreneurs can still take action to protect themselves from future tax policy by building resilience in their business model. This will benefit them regardless of what policies are ultimately enforced.