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Hammond Announces New Tax to Tackle Tech Titans

Pete Swift


Quantum Technology Scottish Universities

The Chancellor has announced a new tax, which is specifically targeted at large, multinational tech companies. The tax will come into force in April 2020 and is expected to raise over £400 million per year.

Chancellor Philip Hammond has announced a new digital services tax to address what he describes as an unfair and unsustainable tax system. He made the announcement in his 2018 budget statement, saying that tax rules must evolve to keep pace with the digital economy:

“There is one stand-out example of where the rules of the game must change now if they are to keep up with the emerging digital economy. Digital platforms delivering search engine, social media and online marketplaces have changed our lives, our society and our economy – mostly for the better – but they also pose a real challenge for the sustainability and fairness of our tax system.

“The rules have simply not kept pace with changing business models and it is clearly not sustainable or fair that digital platform businesses can generate substantial value in the UK without paying tax here in respect of that business.”

“We cannot simply talk forever”

Hammond argued that the UK had been leading efforts to reach a global consensus on changes to the corporate tax structure, which would tackle the ineffective taxation of multinational technology companies. However, he said that progress had been so slow that he needed to take action:

“The UK has been leading attempts to deliver international corporate tax reform for the digital age. A new global agreement is the best long term solution, but progress is painfully slow and we cannot simply talk forever. So we will now introduce a UK digital services tax.”

A narrowly targeted tax

The Chancellor was clear that the new tax would be levelled specifically at large technology firms, and would not impact start-up entrepreneurs or raise the costs for the end consumer:

“This will be a narrowly targeted tax on the UK generated revenues of specific digital service platform business models. It will be carefully designed to ensure that it is established tech giants rather than our tech start-ups that shoulder the burden of this new tax.

“It is important that I emphasise that this is not an online sales tax on goods ordered over the internet. Such a tax would fall on the consumers of those goods and that is not our intention. The digital services tax will only be paid by companies, which are profitable and which generate at least £500 million per year in global revenues in the business lines in scope.

“We will consult on the details to make sure that we get it right and to ensure that the UK continues to be the best place in the world to start and scale up a tech business.”

Stamping out unfair business practices

At the root of Hammond’s plans is increasing tax revenues by clamping down on what is widely considered to be unfair business practices.

He claimed that with the package of measures he has announced, the UK will further clamp down on tax avoidance, evasion and unfair outcomes and raise another £2 billion over the next five years.

Hammond has proposed to make HMRC a preferred creditor in business insolvencies to ensure that tax which has been collected on behalf of HMRC is actually paid in full. He also wants to end the practice of purchasing services through oversees branches to avoid UK VAT; crack down on insurance companies rooting services through offshore territories, and stop R&D tax credits being abused by reintroducing a PAYE restriction for the small and medium size companies scheme.

A more fair and sustainable tax system

The chancellor was clear that his key intention was to improve the fairness and sustainability of the tax system and said: “It is only right that global giants with profitable business in the UK pay their fair share towards supporting our public services.”

The ability to effectively tax global companies has come under increasing criticism over recent years. And while a large portion of the criticism has been directed at multinational tech firms themselves, these companies have long insisted that they pay all of the tax that they are legally obligated to.

While critics have argued that tech companies have not abided by the ‘spirit’ of the law, the leaders of these companies are judged primarily on profitability and have a fiduciary duty to their shareholders. This ensures that a portion of blame has to lie with UK lawmakers, who have a responsibility to make the rules more effective.

UK will still push for a global tax agreement

Hammond announced that the tax is expected to raise more than £400 million per year, but will not come into effect until April 2020. In the meantime, he says the UK will continue to work with the OECD and the G20 to seek a global tax solution and, that if one emerges then he will consider adopting it in place of the UK digital services tax.

Pete Swift

DIGIT Managing Editor and Head of Research

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