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A Short Practical Note on E-Commerce and Tax Print E-mail
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TaxationWeb by Simon Sweetman

Simon Sweetman, vice-chair of the tax policy unit of the Federation of Small Businesses gives a brief note on the taxation of ecommerce for those new to trading on the net. This is an introduction to a more detailed article on E-Commerce Taxation, available to download from http://www.taxationweb.co.uk/businesstax/ECommerce_Taxation.pdf

This article is about tax questions arising from electronic commerce : this is a complex area and professional advice should be taken before taking any risks with potential tax liabilities. It also moves rapidly. A chapter written a year ago (for instance) could have a very different take on music downloads, which were then largely illegal, than it would now.

Electronic commerce is an opportunity for traders (though not without its problems) : for tax authorities it is a potential menace, because:
  • Electronic commerce is enabling more businesses to trade across borders.
  • There is less need for some businesses to be physically present in territories in which they have customers.
  • Physical 'residence' and 'establishment' is one of the underlying principles of tax jurisdiction.
  • Income source is another underlying principle and this is challenged by different ways in which 'products' or services can be delivered, especially where they are electronically downloaded from the internet.
  • More businesses can sell direct to customers without using locally based distributors or agents, which leads to a higher volume of lower value transactions, especially if the business is selling direct to consumers.
  • Direct sales whereby businesses supply direct to customers, possibly electronically, without the need for transport carriers mean a traditional approach to monitoring trading activity and capturing tax is not relevant.

What you need to do when you start

  1. If you are a new trader, or if this is a new trade, you need to notify the Inland Revenue within six months of starting to trade (just as with a conventional business). If it is merely an expansion into e-commerce for an existing business, there is not need for this.
  2. The website should show
    • The legal name and trade name of the business
    • The principal physical address or addresses
    • The email address
    • Any registered address and government licence numbers
  3. The principles of record keeping are no different for e-commerce.

Tax and e-commerce : the story so far

After some early excitement, tax authorities have tended to concentrate their attention on the indirect tax side where the risks seem to be higher. For instance, if you buy a CD over the internet from the USA you will pay less than many US customers, because you will not pay US state sales tax : you ought to pay VAT and import duty when it comes in and the Royal Mail just might make the effort to collect it. That, however, is beyond the scope of this article.

Key questions

1. What are the business/direct tax implications of commencing trading over the internet? Section 11:2.2

If an existing UK trader begins to sell from a website then there is no immediate difference. Even though customers are overseas the business is based in the UK and will be taxable in the UK on all its sales

For a new UK business which sells only over the internet the position is the same, though many such businesses will begin in a very small way (by buying and selling on auction sites, for instance) and the point at which trading begins is hard to spot.

2. What international business/direct tax considerations arise from trading in different countries? Section 11:

To answer this question we have to look at what "trading in different countries" actually means. Under most double tax treaties, a trading entity will be taxed in a country which is not its "home" only if it has a "permanent establishment" in the country. That is defined so that a permanently based salesman would constitute a "permanent establishment" but if there is nobody based there then there will be no liability for tax there.

Merely selling your goods in another country, whether by mail order or over the internet, will not make you liable to pay direct taxes in that country.

But what administrators will fear is that a business which has needed a presence in their country in the past and has paid tax there can now withdraw to a website

3. Does it make a difference where the fileserver, on which a trading website runs, is located? Section 11:2.3.3

Here we begin to find an area of difficulty. Can a fileserver be a permanent establishment? Different Revenue authorities tend to have different views on this point, but the Inland Revenue has said firmly that it does not think so. To quote

In the UK, we take the view that a website of itself is not a permanent establishment. And we take the view that a server is insufficient of itself to constitute a permanent establishment of a business that is conducting e-commerce through a website on the server. We take that view regardless of whether the server is owned, rented or otherwise at the disposal of the business.

One reason for that is that enterprises which trade only over the internet may try to set themselves up in low tax jurisdictions (or, in the long term, even on satellites) and argue that this is where their business is carried on. For example there is a company which offers to provide web hosting facilities on the self styled Principality of Sealand (established on a wartime fort off the Suffolk coast) with the clear intention of offering a location in a tax haven.

Of course this raises the question of where a website is located (and the assumed answer seems to be that it is where the server is). This - like the accounting practice which says that a website is a tangible asset - might be debatable but may equally be legislated as a convenient fiction.

4. Can the downloading or electronic delivery of products affect the business/direct tax treatment?

Where the internet is merely used as a medium for ordering and paying for the goods then that presents no more tax problems than mail order which uses the post as a medium for payment and delivery. Downloads - whether of words, of music, or of software - may present more of a problem. Where is the transaction carried on ? So far the general assumption is that it is carried on at the website, and that equals the fileserver.

In the 1990s this all seemed to create quite a stir. The OECD in particular set up working parties and so did many tax administrations, but many of them have subsequently gone rather quiet. However the OECD is still thinking about the matter, and in November 2003 issued a new discussion paper entitled Are the current treaty rulesfor taxing business profits appropriate for e-commerce ? Not a very snappy title, perhaps, but refreshingly low on spin. If you are really keen you can find it at http://www.oecd.org/dataoecd/2/38/20655083.pdf(but it is 85 pages long and the consultation period has expired).

Most of what you might need to know as a UK based trader is on the Inland Revenue website at http://www.inlandrevenue.gov.uk/e-commerce/index.htm, but this is fairly basic stuff.

The Inland Revenue produced a policy paper in 1998. It said that the priorities for UK businesses were that they needed
  • Certainty about the tax rules
  • Neutrality between electronic and conventional commerce
  • No double or unintentional non-taxation
  • Compliance costs should be as low as possible
  • No new taxes on electronic commerce

And certainly no government has yet attempted to put special taxes on profits from e-commerce.

Apart from this I can recommend (as a guide to the basics) the tax websites for Singapore and New Zealand, where they have produced useful guides to the taxation of e-commerce (and in English at that).

Read the full article on http://www.taxationweb.co.uk/businesstax/ECommerce_Taxation.pdf

About the Author

Simon Sweetman is an independent tax consultant specialising in the taxation of small and family businesses. He is vice-chair of the tax policy unit of the Federation of Small Businesses and a member of the small business working group of the Chartered Institute of Taxtation, and can be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it
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About The Author

Mark McLaughlin

Mark McLaughlin is TaxationWeb's Co-Founder, Director and Technical Editor. He is a Fellow of the Chartered Institute of Taxation and a member of the Association of Taxation Technicians and the Society of Trust and Estate Practitioners. He lectures on tax subjects, is co-author of Tottel's IHT Annual and Ray & McLaughlin's IHT Planning, and Editor of Tottel's Tax Planning and Annual series. Mark's work has also been published in Taxation, Tax Adviser, Tolley's Practical Tax, Tax Journal and Simon's Weekly Tax Intelligence.

Since January 1998, Mark has been a consultant in his own tax practice, Mark McLaughlin Associates, which provides tax consultancy and support services to professional firms. He publishes a regular 'Tax Update' e-Newsletter for clients and other professional firms. To receive future copies, contact Mark via his website.

Article Added Saturday, 04 October 2003 | 7768 Hits
 

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