UK government eyes up Silicon Valley for tax raid

Chancellor of the Exchequer Phillip Hammond has confirmed a ‘digital tax’ in the autumn budget aimed at holding the internet players accountable to reasonable tax rates.

In recent years, the internet giants of the US have become known as much for creatively sidestepping the tax man as they have for innovative products and services, but the playing field is shifting. The European Commission is currently attempting to align the interests of all member states to impose its own tax regime, though Hammond isn’t waiting for the boresome Brussels bureaucrats.

“The UK has been leading attempts to deliver international corporate tax reform for the digital age,” said Hammond in the House of Commons while unveiling the budget. “A new global agreement is the best long-term solution. But progress is painfully slow. We cannot simply talk forever.

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

This is the tricky aspect of the new tax; how do you hold the internet giants accountable within placing too much of a burden on the start-ups? These are companies which need assistance to thrive, and an important segment for the UK. Start-ups, most importantly technology start-ups, have been targeted by the UK government to stimulate the economy in a post-Brexit world, but with the threat of digital tax, will these companies want to choose the UK?

The tax will be targeted at revenues generated through search engines, social media platforms and online marketplaces. Long story short, 2% of total revenues generated in the UK will be claimed by the tax man, generated £400 million a year, in theory. The new tax regime will come into place in April 2020, though should the European Commission come up with its own approach, the whole scheme might be scrapped.

For years the internet giants have been shifting profits around and claiming suspect charges to reduce exposure to the tax man. According to a Tax Watch UK study looking at Apple, Google, Facebook, Cisco Systems and Microsoft, the tax liability in 2017 was estimated at £1.26 billion, though only £191 million was paid.

Politically the digital tax is a win for the Conservative government, though at a time where the UK needs to make as many friends as possible while going through an expensive divorce, it is an interesting approach. With a no-deal Brexit looking increasingly likely, the UK needs to attract new investment into the economy and build relationships with trade partners. Taking a combative approach to tax is hardly going to get the internet giants on side, and might well irritate the US government.

Tackling the creative accountants in Silicon Valley has been a government discussion for years, though whether the aggressive approach from the UK will stimulate any progress through the rest of the world remains to be seen.