Expect movement on digital service tax, says Stride at CIOT Conservative Conference event (plus audio)
Chancellor Philip Hammond said in his Conservative Conference speech that Britain will unilaterally implement a digital service tax if there is no international agreement soon on how to tax big internet companies, blaming US tax reforms for slow multilateral progress. Speaking at a CIOT/IFS fringe debate at Conservative conference the next day, titled ‘What does fair business taxation look like in a digital world?’ Tax Minister Mel Stride said to ‘expect some things coming down the line’ from the Treasury on Hammond’s pledge.
The Financial Secretary said a multilateral approach is preferred by the Government, although he accepted this is a slow process. On EU proposals to tax digital companies, he said they must include some des minimis threshold to prevent disincentives for start-ups. The MP said that, although the public find some parts of tax quite dry, the issue about business rates on shops versus no business rates charged on online traders shows how tax can be a talking point for the public in the ‘Dog and Duck’ pub.
Stride said the taxing of digital MNCs should not be a debate about ‘loopholes’. Rather, the Government thinks that the 1920s model of international taxation that still exists is ‘not fit for purpose’ in terms of catching the value that some of these digital business are generating in the UK today. He went on to say there are three distinct categories of digital businesses in the UK: online retailers, social media platforms and search engines. None of the historical approaches to tax that we are still using today take account of user behaviour in relation to these three businesses, he said.
In general comments, the minister said the tax terrain is changing. For example when you look at how people work with advent of the ‘gig economy’ and personal service companies, you see whole areas of tax system where stability is ‘crumbling before your eyes’. He compared this to the stability brought by property taxes, such as stamp duty.
He explained the lens through which he looks at taxes: they should be competitive, they should be fair and they should be paid, he said. He went on to say the Government has an especially good record on tax avoidance and evasion, as a result of tackling tax loopholes; the Tax Gap figures are proof of this, he argued.
Stride, also the Paymaster General, was one of four speakers at the event. CIOT President Ray McCann chaired the debate for an audience made up primarily of Conservative party members, business visitors to the conference and tax and accounting professionals. The debate was held at the Jury’s Inn, in Birmingham, on Tuesday 2 October 2018.
Conservative MP Robert Courts, Chair of the All Party Parliamentary Group for Small and Micro-Business, spoke about the challenge of being a constituency MP in Oxfordshire who is watching uncomfortably as digital companies compete with his local shops, the ‘jewels of our high streets’. What may seem a dry topic of tax actually touches on the emotive issue of fairness, with the MP saying this is very much a ‘live’ issue in his constituency. He spoke about the imbalance of large multinational companies, such as Amazon, competing with local businesses that are grappling with business rates. We must have an economy where entrepreneurship is rewarded, he added. He believes in maintaining the social value of high streets, with the help of the tax system.
Digital dilemma: (Left to right) Courts, Stride, McCann, Hooper and Johnson
EY’s Claire Hooper, Chair of the CIOT’s Corporate Taxes Sub-Committee, said that, from a corporate perspective, fairness means clear rules with certainty of treatment, everything that should be taxed is taxed, things should not be taxed more than once and, ideally, you want the same treatment of taxpayers in the same situation. At the heart of the question the event intends to answer is not tax avoidance, particularly post–BEPS and post-USA tax reform, but rather whether the rules as currently drafted allocate taxing rights to the jurisdictions that the governments want them to and whether the public understand that, she said. Some governments could look at their mix of revenue and how much corporate tax should be part of that, she suggested.
The Treasury is looking at ‘user created value’ in relation to digital businesses but Hooper said market research and feedback from customers has always been helpful to companies, although consumers now seem to be doing some of the supply side functions for some digital companies. When was the value added, she asked. By the user or during the design stage, when the algorithm was created?
Paul Johnson, Director of the Institute for Fiscal Studies, addressed some common misconceptions on the issue of fairness. Ninety per cent of all tax is remitted by companies to HMRC, he said. This means the direct payers of tax are very largely companies. However, in the end corporate taxes can only be paid for by people, either by shareholders or by workers or by consumers via higher prices, although there is not much data on the respective proportions. He explained that small companies can be owned by very rich people and we must not assume large companies are owned by a few rich shareholders.
Since the 1920s, the tax due is determined by the cost to your business if you had to buy some service or goods from an independent business overseas (even if you just purchase from a subsidiary) – which is how transfer pricing works. But the world is more complicated today, not least because different subsidiaries do one than one thing and complications with identifying where the value is created. In the digital world, you have companies making money where they are not manufacturing anything – hence the heated debate. Taxing where sales are made is not going to happen in his lifetime, he said, because there will be big winners and big losers.
Many of the questions from the audience called for action on business rates on shops. Rates are not the entire picture as to why high streets are struggling, Stride replied; it is partly explained by changes in customer behaviour. The Government must encourage the transformation of high streets all the same, he said. Johnson said a reduction in business rates in the medium run will help people who own the shops significantly more than those who rent them. The other instruments that you need to think about are regulation and planning, he suggested. Can the business rates system be used to tax online businesses when they use physical infrastructure such as warehouses, an audience member asked.
On the NICs differences between employees and the self-employed, Johnson said this is an example of unfairness in the tax system but politics makes it difficult to challenge. Stride said it is reasonable that the tax system helps entrepreneurs compared to those working for a large company in a more secure role.
A wholesale slimming down of the tax code would create winners and losers and the Government would have to be sitting on a majority of 100 seats in the Commons and be fairly sure they will be elected again to enjoy the benefits, said Stride. Finance Bills are long partly because they take account of carve outs, having to include many definitions and the need to tackle loopholes and, of course, reliefs. Courts said a slimmed down Finance Bill could risk being a blunt instrument. A slimmed down Finance Bill, although desirable, may lead to unintended consequences such as loopholes. Hooper explained that length and complexity are not necessarily the same thing. Stride said he is working on a project with HMRC to use guidance to help slim down the tax code.
On IR35, Stride acknowledged that widening the off-payroll working rules to the private sector would create a ‘heap of complexity’.
Hooper said companies will look at all of their costs before deciding where to situate different parts of their business; tax is only one of the reasons.
Stride said HMRC would be able to cope with a digital tax, given the skills of the people within it. He added that HMRC is pretty good in comparison with other tax authorities in the world, pointing to it handling millions of self-assessment tax forms a year.
Short introduction from Ray McCann followed by Paul Johnson and Claire Hooper
Slides from Johnson and Hooper below
Robert Courts MP and Mel Stride MP (5.03)