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

The Daily Telegraph - Business - - Technology Intelligen­ce -

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.

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