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Digital services tax weakens the case for tech startups to choose the UK

The UK government’s plan for a tax specifically targeting big digital firms risks undermining international efforts to reform corporate taxation for the digital age

Last week, the government published a report showing that the UK is the “tech unicorn capital of Europe”, creating 35% of all technology companies valued at over $1bn in Europe and Israel in the last decade. This week, the chancellor told these fast-growing UK companies that he plans to introduce a brand-new tax on them if they get too big.

Despite claiming that this is a measure targeted only at tech giants, its scope could easily capture UK success stories should their global revenue top the (relatively low) £500m threshold, for activity such as online marketplaces, social media platforms or search engines. 

Investors and entrepreneurs have traditionally viewed the UK as the best place outside the US to start and grow a tech business. At a time when Brexit is already undermining that status, the digital services tax announced in the Budget risks raising new questions about whether the UK really is the natural second home for tech.

The problem isn’t the amount of tax being levied. It is the proposed method, which will be complex and unpredictable, and the impact it will have on international progress towards a real solution to how to tax a modern global digital economy. This is risky tinkering when well-thought-through structural changes are needed in global tax reform – reform that “Global Britain” should be championing.

Instead, the chancellor’s plan risks stymieing efforts to reach an international agreement on taxation of all multinational companies. Progress at the OECD has stepped up in recent months, with concrete proposals expected in June next year and an aim for consensus in 2020.

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The ideas being put forward by the UK’s competitors, such as Japan and Germany, are focused on fixing the whole tax system, not trying to single out tech companies as the UK is now proposing. How much harder will it be to get the US and others to agree to such an approach now that the UK is effectively planning to target specific companies? And what retaliation could the Trump administration decide to take if it views the UK’s new tax as a non-tariff barrier aimed at the US?

TechUK, as the voice of the UK’s technology industry, remains opposed to this digital tax. Rather than further weakening the case for tech firms to scale and grow in the UK, the chancellor should use the time to 2020 to seek the real, longer-term international reform needed, and lay the foundations for the UK to develop its own big tech success stories – not stifle their growth.

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