Buying online doesn’t mean shoppers pay less tax

My first experience of the sharp end of Revenue collection enforcement came when I was still in secondary school. Some of the other lads and I clubbed together to buy a few singles from a mail-order outfit in the US.

In case my teenagers are reading this, a single was a vinyl disc, seven inches in diameter which held two songs, one on the front and one on the back.

We thought it was smart to buy them mail-order because the prices were marginally cheaper and as boarders we didn’t get out to the shops much.

The process was easy, sort of.

All you had to do was tear out a form at the back of a comic, fill in your name and address in block capitals, tick the names of the singles you wanted, calculate the post and packing, buy a postal order for said amount, and put the whole thing in the post.

Then you had to wait three weeks for delivery.

This is where the problem arose. The package of records arrived at the school, but there was Customs due on it.

We hadn’t read, or more likely hadn’t understood, the small print.

The school head was a practical man and paid the Customs’ fine but wouldn’t let us have the records until we had paid him.

These days the web page has largely replaced the magazine clipping, and the credit card has certainly replaced the postal order but the fundamental business transactions remain the same.

For tax purposes, buying something online should have exactly the same consequences when it comes to Vat or any other taxes, as if you had walked up to the counter with the item in your hand.

There is an ongoing international debate on the taxation of the ‘digital economy’.

Several issues create problems. There’s the international aspect. Many purchases and sales are made across borders.

Then there can be difficulties because of the types of items being bought. Goods and services bought online are sometimes intangible.

It’s one thing to buy an item of clothing and have it delivered to your door, but what tax should be charged on a digital download that goes straight to your media player or a digital book that goes straight to your handheld reader?

As the volume of internet commerce grows, these aren’t trivial questions.

Countries are concerned that they are losing tax revenues to other territories, or worse still, that tax revenues are disappearing altogether.

Last week the UK government published an independent review of its own economic data.

The author, a professor in the London School of Economics, suggested that if the digital economy was fully captured by official statistics, it could add between one-third and two-thirds of a percent to the growth rate of the UK economy.

That mightn’t sound much, but governments need to know their GDP figures accurately to budget for tax and spending. In an economy the size of the UK, these differences add up in the billions of pounds.

In the early days of the internet there were all kinds of weird and wonderful suggestions made. One of these was a “bit tax” where there would be some kind of levy imposed on the volume of materials downloaded.

There was also a notion that the information which companies gathered online from customers had a particular value — which of course it has — and that there should be a tax charged on some notional estimate of what the information was worth.

So, for example, if a UK company had 10,000 customers in France each of whom had supplied details of their addresses and preferences, the French government should receive some tax from the UK company because of all the work their citizens had done providing this information.

Last year, the EU introduced new rules for charging Vat where EU-based businesses are providing online services to customers.

These new rules help ensure that if an Irish customer buys an online service from a company in Luxembourg, Irish Vat at 23% is paid rather than Luxembourg’s Vat rate of 18%.

Vat is only one part of the taxes a consumer pays when shopping online.

If you’re buying from a country outside the EU, there could also be Customs’ duty payable on higher value items. In addition, Excise Duty is always charged on products like alcohol and tobacco.

A search for ‘Ordering Goods for Personal Use’ on the Revenue Commissioners’ website will give you chapter and verse on the extra tax costs which might apply to your online shopping experience.

Whatever you buy online might be cheaper because of the efficiencies in the way your order is processed and delivered.

It’s unlikely to be cheaper because there’s less tax to be paid.

Brian Keegan is director of taxation at Chartered Accountants Ireland