Missing the target: pressure mounts for digital tax rethink with small firms caught in crossfire
Burden of the levy failing to fall on tech giants as intended, write Hannah Boland and Michael Cogley
At the start of April, much of the nation’s focus was elsewhere. Talk centred around “flattening the curve” and social distancing, companies were transitioning vast numbers of staff out of the office and scores of others were being placed on furlough. In the midst of all this, a landmark moment almost passed by unnoticed. A sweeping new tax on tech giants, which had been years in the making, finally came into force in the UK.
The initial remit of the tax, from then-chancellor Philip Hammond, had been clear. It was “designed to ensure it is the established tech giants rather than the technology start-ups which shoulder the burden”. Yet now, almost two years after plans for a tech tax were first mooted and months after it was introduced, it appears the burden will fall elsewhere. In the past few weeks, first Amazon, then Google and now Apple have confirmed they will be passing the costs of the 2pc tax on to those using their sites to sell goods or run adverts.
The Treasury will still be collecting as much as £500m every year from the tax, which applies to social media firms, search engines and what are deemed “marketplaces”, which facilitate sales between two parties.
The difference is, that cash won’t be coming from the tech companies. It will be coming from the small businesses who sell over Amazon’s marketplace, the advertisers who pay to have their ads appear on Google, or the app developers who use Apple’s App Store to reach customers.
Richard Murphy, Tax Research UK founder, says this will be the “easiest tax on Earth to pass on”, as the tech giants like Facebook, Google and Twitter are “effectively monopoly suppliers”.
“The reality is those platforms are unique and they can therefore pass the cost on if someone wants to advertise with them,” he says.
This stems from the fact the tax is on revenue, instead of profit. “This is essentially a sales tax levied on top of
VAT on these companies and what we know about this form of sales tax is that it’s passed straight on to the consumer,” Murphy says.
Air passenger duty, for example, is a tax on airlines and not passengers, but it is determined by the passenger and is therefore passed on by the airline as part of the overall price. “We’ll see something very similar in the DST [digital services tax] in that it will be included as an extra cost for the buyer or seller,” says Chris Sanger, head of tax at EY.
Tech firms have never shied away from plans to pass on the tax. In consultation documents from 2018, the Government noted that “a number of respondents raised concerns about revenue-based taxes, regardless of exact design”.
“This included noting that revenue-based taxes can generate high effective rates of tax on profits, risked being economically distortive or could be passed on in prices to other businesses and consumers.”
Amazon, too, said it warned the Treasury of such a scenario. “As we’ve previously indicated, the way that the Government has designed the digital services tax will directly impact the businesses that use our services,” a spokesman for the retailer said.
The fact that this outcome is now playing out in the public eye could, however, pile pressure on the Treasury for a rethink.
“It beggars belief that the vast majority of the Big Tech giants subject to the new digital services tax are shirking their responsibilities and passing the buck on to customers or smaller businesses,” MP Dame Margaret Hodge says.
“At a time when more and more money is being spent online, these huge digital corporations should pay the new levy themselves.
“Most hard-working people pay their taxes; it’s only fair that multinational companies should do the same.”
Under the current legislation, the likelihood is that the tax’s intended targets will be missed almost
‘At a time when more is being spent online, these huge corporations should pay the new levy themselves’
entirely. “As usual with these sorts of regulations and tax increases, it’s the smaller businesses that end up suffering disproportionately,” says Richard Windsor, the Radio Free Mobile founder.
The question now is whether changes could be introduced to the tax to stop such practices taking place, and whether the Treasury could introduce legislation to block charges being passed on to small businesses and customers.
The Government may have limited power to force firms to pay the tax themselves, but competitive pressures could change decisions.
Facebook has insisted it won’t pass on the costs of the tax to its UK customers in a move that will certainly draw the ire of cynics who may dismiss it as nothing more than a PR move.
Tax Research’s Murphy believes the social media giant will find “some other way” to make up for funds lost through the levy.
Yet, even so, Facebook’s decision could be enough to force attitude changes among the likes of Apple and Amazon.
And, in doing so, it could save the Government from yet another embarrassing about-face.