Tech titan’s advertising fee fails to match pledge to help entrepreneurs
Passing on the Treasury’s new tax raises tough questions over the search giant’s support for SMEs
Google’s email to customers this week would have come as a big surprise, as it announced that from Nov 1, there would be a 2pc fee added to their spend on its advertising in the UK. A 5pc charge is also being added for Google Ads in Turkey and Austria.
This comes as a result of the digital services tax (DST), which applies to revenues generated by social networks, search engines and online marketplaces. To be liable to pay the levy, companies must be profitable and generate more than £500m a year in global revenues.
The Government brought in this levy on April 1 and it is intended to increase tax revenues from the internet giants, who have been accused of using their global footprints to avoid paying tax in some of their biggest markets.
The UK is Google’s biggest market outside of the US and a global leader in e-commerce spend per capita.
Similar schemes have been put in place in other countries, hence the extra charges in Turkey and Austria announced at the same time.
Google makes most of its huge annual revenues from the short text ads that appear at the top of its search engine results on mobile phones, laptops and tablets.
That includes $15bn (£11bn) from ads on YouTube, which the company acquired back in 2006 at a cost of $1.6bn. This service is of course free to users and incredibly popular, but is paid for by a charge to advertisers every time someone clicks on one of the ads served up alongside the search engine results.
Instead of taking on DST as a cost of doing business in the UK, the attitude of most companies to government taxes, Google has chosen to pass it wholly on to its many customers here.
Although big brands do spend large sums on Google and YouTube advertising, it is in fact the thousands of smaller businesses that use the online ad service that drive the majority of Google’s massive profits. These businesses will be hardest hit by the sudden and unprecedented extra charges.
The 2pc tax applies to any revenues generated through advertising to Britons or revenues made through facilitating transactions, such as food delivery platforms.
Previous estimates have suggested it would affect only around 30 companies, but could in fact raise as much as £500m a year in badly needed extra revenue for the Exchequer.
Amazon has already announced the tax will be passed on to customers.
Like many tech companies, Google has been quick to trumpet how it is helping small businesses during the Covid-19 pandemic.
Announcements of extra tools or free digital training have been rolled out. But this new move seems to imply that these concerns for small businesses are more of a PR exercise, and perhaps are mainly aimed at getting more people to use Google services – so the search engine can profit from increased digital usage during lockdown and with more people working from home.
As small businesses across the UK struggle to survive the broad economic damage caused by the coronavirus crisis, the last thing they need is for their advertising costs to rise by an arbitrary 2pc, just so that Google can cover its extra tax bill.
There is no extra benefit to the advertisers from this 2pc price inflation, so effectively it will make their advertising a little bit less cost-effective, just at the moment when many may be dependent on driving sales via digital advertising and through selling on their websites.
A knock-on effect from this will also be to impact the many freelancers or small digital ad agencies that help businesses get online across the country.
Clients might choose to try to reduce their spend or perhaps look to reduce the fees that they pay small agencies by passing on the cost of Google’s tax-related increase to them. This risks the revenues of those businesses and is another negative impact of Google’s decision that flows down the internet ecosystem on which it sits astride.
When Philip Hammond brought in this tax, the expected outcome was to get more revenue from the global tech giants that were accused of exporting large profits from UK consumers and companies through complicated schemes to Ireland or Amsterdam – and therefore reducing their tax liability to the Government.
However, the Google announcement this week seems to show that the search giant has no concern for this intention and is happy to pass the buck to small businesses across Britain – most of whom don’t have the option to minimise their tax bill in the way that the firm continues to without a second thought.