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Hammond’s digital services tax is a big risk, say experts

The tech industry is not impressed with the chancellor’s plan to tax web giants, saying it can stifle innovation, while tax lawyers warn that it is a very risky move that could lead to US retaliation

There were a number of technology-related announcements in the 2018 Budget, but one particular measure has caused furore in the tech industry – the digital services tax.

Tech companies are not impressed with the levy on web giants, and tax lawyers warn that it could be detrimental to the UK.

The possibility of a digital services tax was first aired by chancellor Philip Hammond during the Conservative Party conference, when he threatened to unilaterally impose a UK tax on some of the world’s biggest internet businesses.  

Presenting the Budget yesterday (29 October), Hammond made good on this threat, slamming a 2% tax on “large, profitable companies” that generate at least £500m a year in global revenue from April 2020.  

The tax will generate more than £400m a year for the UK economy, said Hammond.

The chancellor said plans to impose taxation on the internet giants are already in the works, but have not moved on as far as he would like.

In the absence of a global agreement, which is currently being worked on by the Organisation for Economic Co-operation and Development (OECD), the European Union (EU) has been working on an initiative since new rules were proposed by the European Commission (EC) in March 2018. Hammond said he would welcome an international agreement, but the UK has waited long enough.

“If one emerges, we will consider adopting it in place of the UK digital services tax,” he said. “But this step shows that we are serious about this reform. It is only right that these global giants, with profitable businesses in the UK, pay their fair share towards supporting our public services.”

Tech industry unimpressed

Despite the chancellor describing the levy as a “narrowly targeted tax on the UK-generated revenues of specific digital platform business models” that will be “carefully designed to ensure it is established tech giants and not startups that shoulder the burden”, the tech industry is not impressed.

Tech Nation CEO Gerard Grech said he agrees that as more and more businesses become digital, the way the government imposes taxes on companies has to evolve, and that the UK is well placed to lead the way.

But he said the 2% tax on the revenues of multinational technology companies “risks stifling entrepreneurialism and innovation, which recent governments have done much to encourage”.

“We have heard assurances that the new tax, designed to raise more than £400m, will not be a crude digital sales tax and will not impact smaller digital platforms,” said Grech. “But tech startups and entrepreneurs can be forgiven for feeling that they could still end up in the sights of future chancellors.”

Read more about the digital services tax

TechUK CEO Julian David agreed with Grech. The OECD aims to reach consensus on an agreement by 2020, and the government’s proposal risks cutting across this timescale, said David. “It would be bizarre if the UK were to implement a new tax just as real and substantive international action is being reached,” he said, adding that the £500m threshold is not high enough.

“This approach risks undermining the UK’s reputation as the best place to start a tech business or to invest,” said David. “The £500m threshold the chancellor proposed is low and risks capturing much smaller companies than anticipated.”

It is easy to argue that the biggest internet firms, such as Amazon, Google and Facebook, are well overdue a big tax bill. Amazon’s recent tax bill fell by 38% to £4.6m, despite its profits tripling to £80m with a turnover of almost £2bn, while in 2017, Facebook’s UK tax bill was £2.58m after recording revenue of £842m.

Lawrence Jones, CEO of Manchester-based hosting firm UKFast, agreed it is high time that the web giants coughed up and for the government to take action on the “pitiful amount of tax paid”.

“If all UK businesses took advantage of the tax rules that apply to offshore businesses, the country would collapse,” said Jones. “It’s the tax-paying entrepreneur that props up this country and it’s time for these tech giants to pay their share.”

Tax lawyers warn of risk

While the tech industry weighed in with its opinions, several tax lawyers said Hammond should heed warnings that the proposed digital services tax could cause more harm than good.

Miles Dean, managing partner of Milestone International Tax, said that inventing a digital services tax “isn’t the answer”.

“At a time when the UK must pull out all the stops to attract inward investment with Brexit looming on the horizon, it beggars belief that a Conservative chancellor should contemplate levying a brand new tax on companies that have already invested heavily in the UK, employ thousands of people and whose total tax contribution is very often overlooked,” he said.

Dean said the tax could lead to retaliation from the US. “The idea that the UK is prepared to ‘go it alone’ without any international consensus is ridiculous and will undoubtedly lead to a retaliatory response from trading partners, most likely the US,” he said.

Chris Denning, head of international and corporate taxation ad MHA MacIntyre Hudson, also warned of possible retaliation from the US.

“This tax is clearly aimed directly at US technology companies,” he said. “When the news sinks in across the pond, it could raise the possibility of retaliatory measures from the US government. Dragging the UK into an acrimonious quarrel with one of its largest trading partners is perhaps not what the chancellor intends.

“The other side of the argument is that the UK will be seen as leading the way, as with previous measures, such as the diverted profits tax and the hybrid mismatch rules. Once the UK introduces this tax, it is may be thought inevitable that other territories will follow. So any non-levelling of the playing field that this may create from the UK’s perspective will, hopefully, be short-lived.”

Before implementing the new tax in April 2020, the government will put the proposal out to consultation, but only time will tell how the US will react.

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