That is the warning from Swiss investment bank UBS, which has examined the impact of a potential tax for online companies, calls for which have grown in recent months.
“While there are clearly other priorities for the government (Brexit, possible General Election), and this is a complex area, there seems to be more acceptance that change is required, if only to protect future tax receipts as store closures accelerate,” said analysts in a note to clients.
Physical retailers being punished
Under the current rules, businesses are taxed on their properties. This unfairly hits those with lots of buildings, such as retailers, especially if those buildings are in prime locations, such as high streets and shopping centres.
By contrast, the online lot generally operate from a handful of factories which tend to be located in industrial estates and away from town and city centres, where rates are much higher.
When the vast majority sales were carried out in store, say 15 or 20 years ago, that made sense: those with big shop estates would generally be selling more goods so they’d be paying more taxes.
But things have changed dramatically over the past five years and online sales now account for more than 30% of all sales in the UK.
The rate system has tipped in favour of the web-based companies, and UBS believes it has simultaneously contributed to the increasing number of CVAs in the industry.
“Amazon, for example, pays business rates of £63mln on sales of c£8.8bn, less than all the major food and non-food retailers,” note UBS’s number crunchers.
2% levy is plausible, says UBS
Not only are the physical retailers paying more in taxes, but their online rivals are able to cut their prices due to the lower overheads, which in turn puts pressure on the bricks-and-mortar firms’ margins.
UBS acknowledges that this is a “complex area”, and a particularly uncertain one given the goings-on in Westminster, so can only make educated guesses as to what the government might do.
“Our model assumes a 2% levy on online non-food sales, excluding click & collect, funding a 25% reduction in non-food rates. We assume no change for food retailers as their online exposure is much lower.”
Should the government go through with this particular model, it would actually bring in an extra £200mln a year for the treasury, although this would be expected to rise over time.
ASOS shares slide
After fiddling with their abacuses, the analysts reckon ASOS and Amazon would be the hardest hit by any changes.
“The biggest loser in our universe would be ASOS, where pro forma group profit before tax would decline by 36% on our assumptions.
“In reality, there would be some offset from either price increases or pass through of the charge. The latter could be made easier if the levy is designed as an environmental charge.
“However, either of these options would make Asos less competitive at the margin against multi-channel competitors, especially at a time when Asos' underlying margins have been deteriorating.”
That gloomy outlook contributed to a 6% fall in ASOS shares on Thursday, with the stock dropping to 2,150p.
As for Amazon, the above changes would cost its UK business another £160mln a year.
“While this would be less than 1% of Amazon's group profit, it would likely be seen more in the UK as a way of ‘levelling the playing field’ between pureplays and multi-channel retailers.”
Dixons Carphone the big winner
In terms of winners, UBS believes value retailers B&M European Value Retail SA (LON:BME) and Card Factory PLC (LON:CARD) will gain due to having no online presence and their lower average basket values.
“On our estimates, B&M profit before tax could rise by 6% as a result, with Card Factory gaining by c7%.”
The company that will benefit the most is Dixons Carphone Plc (LON:DC.), though.
“Businesses with depressed EBIT margins such as Dixons Carphone would conversely benefit as rates are a high proportion of PBT. We estimate DC PBT could benefit by c9%, even with c20% of sales online (average of Currys and CPW).”