The Chancellor gets techy

March 16, 2018

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By Carla Hoppe

The Chancellor’s “tiggerish” Spring Statement sought to show a buoyant economy, resilient in the face of economic pressures and a Government investing in the skills and business of the future. Against this backdrop it was interesting to see that the IFS, has predicted that an additional £31bn of taxes will need to be raised in order to keep to the deficit reduction pledges and still match the spending commitments made.  

One of the taxes which may be called upon to help plug a gap was included in an updated policy position paper on how we should tax the digital economy released by the Government shortly after the Chancellor finished his statement.

The paper sets out the Government’s “updated thinking” on how the tax norms can get ahead of an increasingly digitised world. The prospect of an increased role for AI and robotics, as compared to people, sets us on a trajectory towards even greater disparity between how we tax the bricks and mortar of “traditional” businesses and those which can harness the power of their global user base to expand their reach without having a physical presence.  

Governments are keen to show they are tough on tax avoidance and to address the growing concern that digital businesses are escaping a fair level of tax due to the tax rules being out of date. The rub is that in introducing these new taxes the Government could risk inadvertently discouraging investment in innovation.

The Government’s position paper recognises this and calls for any changes to legislation to be the result of international consensus, rather than unilateral measures. Government officials have also publicly stated their desire to protect the UK’s status as a hub for fledgling start-ups and emerging tech leaders by creating a safe harbour rule for small businesses and loss-makers.

With the release of separate papers from the  OECD and the EU Commission coming hot on the heels of the UK’s position paper, it is clear there is political will to make ‘some change’, what that change will be in practice is less obvious.

At an international level there is little consensus as to how the proposals for a new digital tax might be implemented. Identifying and ascribing value to users by reference to their contribution to a global value chain is no mean feat, particularly in an environment where the speed of technology development means the way in which we interact with businesses is constantly evolving.

The proposals for a short term solution; a targeted tax on revenues, is no less concerning for business. As a stop gap, the turnover tax could lead to a new norm of additional cash tax outlay, increased complexity and uncertainty for groups who are still dealing with BEPS changes, US tax reform and the prospect of Brexit.

The UK’s preferred position is to have meaningful dialogue with business to inform any new legislation. Businesses should embrace this opportunity to put forward their position, so that the impact of legislation is in line with the Government’s stated objectives, without unforseen collateral damage.  

It is notable that the PwC CEO Survey 2018 reports that tax is one of CEOs’ top ten business concerns and while the UK ranks 7th in the world for ease of doing business in the Paying Taxes Report 2018 it is only 23rd in terms of the ease of paying taxes. In making changes to the UK tax system we will need to be mindful of balancing the need to raise taxes with a recognition that our services based economy needs tech innovation to grow.

Business is no stranger to complexity and uncertainty but to make fundamental changes to the international tax rules we need a thorough review of the way in which digital business operates today and the future of digitisation. Working together on this, Government and business have an opportunity to collectively rebuild public trust in both big tech and the tax system.