A live blog of the fifth public bill committee sitting of Finance Bill 2020 (also known as Finance Bill 2019-21), which took place on Thursday 11 June 2020 from 11.30am. The session focused on Part 2 of the Bill, which covers the introduction of the Digital Services Tax.
Documents on the Bill can be read here. These include explanatory notes on the clauses and the text of amendments and new clauses tabled for debate.
Proceedings can be listened to here.
Reports on previous debates on this Finance Bill are available:
Second Reading debate - Monday 27 April 2020
Public Bill Committee - 1st sitting (liveblog) - Thursday 4 June 2020 (am)
Public Bill Committee - 2nd sitting (liveblog) - Thursday 4 June 2020 (pm)
Public Bill Committee - 3rd sitting (liveblog) - Tuesday 9 June 2020 (am)
Public Bill Committee - 4th sitting (liveblog) - Tuesday 9 June 2020 (pm)
NB. The live blog below is contemporaneous and not checked against Hansard. We cannot guarantee that no errors have crept in and we advise on checking any passage against Hansard before repeating it.
New clauses debated during proceedings will not be voted on until the end of the committee's proceedings
Committee members are listed here. The main contributors were:
For the Government:
Jesse Norman, Financial Secretary to the Treasury (FST)
For the Opposition:
Bridget Phillipson (Labour), Shadow Chief Secretary to the Treasury
Finance Bill Public Bill Committee - Sitting Five - Thursday 11 June 2020, 11.30am
The committee began debating part 2 of the Bill - the Digital Services Tax (DST). The DST is a new 2% tax on the revenues of large digital businesses to ensure that the amount of tax paid in the UK is reflective of the value derived from UK users. The tax will apply to groups providing a social media service (eg Facebook), internet search engine (eg Google) or online marketplace (eg Amazon marketplace).
Clauses 38-44 - Introduction; Digital services revenues, UK digital services revenues etc
These clauses cover, among other things, a number of important definitions including “digital services revenues”, “user” and “UK user”.
Financial Secretary (FST) Jesse Norman spent time outlining the Digital Services Tax (DST) to set the scope of this legislation which specifically targets revenue from search engines, social media and online marketplaces. An exemption will exclude financial marketplaces, he said. A relief for certain crossborder transactions will remove some distortions he hopes. The DST was announced in Budget 2018 as a response to the rapid growth of the digital economy. and certain digital multinationals (DMNCs) not paying much UK tax. It is universally accepted that tax rules on such digital MNCs require change, he suggested. The DST is temporary until an international agreement is reached but is fair and measured in its own right. The Government is focusing on users who create content that is shared, which makes it slightly different to what happens with media companies, for example. The DST will raise up to £2 billion over the next five years, on top of taxes such digital businesses already pay. He said the DST is about focusing on UK users (such as viewers of adverts rather than the company paying for the advert). He set out the many clauses in this group. He said an international agreement is the most robust way to tax these DMNCs.
Bridget Phillipson, Labour, Shadow Chief Secretary to the Treasury, regretted that it has taken the Govenrment so long to create a DST and says they could have been more ambitious sooner. High streets and their family-run firms are the backbone of the economy yet their online rivals do not pay tax like they do. She claimed COVID-19 should hasten the need to tax online companies which are experiencing a boom in the lockdown while bricks and mortar shops are suffering from a lack of customers because of the lockdown. She quoted a Tax Justice UK survey that calls for the closure of loopholes. But she said the DST does not go far enough, criticising the relatively small £280 million it will raise in a financial year. If we are to fund public services well, the Government will have to reconsider if this DST goes far enough. The tax is narrowly targetted but at least embraces the technology giants, she continued.The yield projected for DST is difficult to calculate becuase the revenues due to the UK can only be discovered with external (non-UK) data which may not exist at the moment. She said she would say more about media-streaming companies' exemption in later stages of this Bill. The rate of the DST is among the lowest in Europe, she complained. Why is this the case? The modest nature of this measure is clear from TaxWatch UK estimates that Facebook wll pay an increased tax bill of £39 million despite estimated UK revenues of £2.3 billion. Digital companies such as Amazon which 'blend' their activities will see much of its work not impacted by this measure.
Phillipson wants the measure widened to include media-streaming services, which have seen a real boost in the lockdown. It is easy to measure the value attributed to UK users of such media streaming services, after all. She claimed the current way of taxing media streaming services is not working. How will the Treasury know if the DST is operating well? There is a risk at taking businesses at their word, she warns, when it comes to apportionment. She is concerned about HMRC's ability to manage DST given the challenges of COVID-19 and general cutbacks at HMRC. Time for a dedicated DST team at HMRC?
Phillipson cited CIOT concerns about the uncertainty over definitions in DST and whether they cover online gambling, for example. The international tax system is not fit for purpose and it is regretable that global consensus is lacking - maybe the UK could be more proactive to get international agreement on how to take DMNCs? Will the UK Government reiterate that it will not be deterred on DST by diplomatic pressure from the USA.
Again, she cited CIOT concerns that DST may breach double tax treaties and international trade laws.
Why is the UK pursuing a user-based model when international consensus is against that approach, in her perception.
Again, she questioned the ambition of the Government to tax DMNCs.
Anthony Browne, Conservative, is glad the DST breaks the mould as a turnover tax and hopes to see more of them. All taxes start off modestly, such as stamp duty from which income has grown since it was introduced. For a new tax, you do not know what revenue you will get; uncertainty is inevitable. What work is being done with HMRC to get the right data from companies?
Andrew Jones, Conservative, said the DST is the right thing to do because the economy is changing. Digital companies must pay their fair share of tax, he charged. The thinking behind DST is the shape of things to come. We should make every effort to level the playing field on tax between the high street and digital companies. He called the DST 'pioneering'.
Jesse Norman replied to the Conservative MPs by saying taxes are distortive and that is why we should proceed cautiously. A total of £2 billion is not trivial, though. He said the demands on companies are not that onerous considering the large size of the companies affected; the Government is expecting businesses to come forward and self-assess. HMRC already has a digital team in place to monitor this self assessment, he said. The Government has been at the forefront of changes to tax, siting DPT for example. Many high street shops have online sales which will not be caught by this tax, but he warns that such hybrids will be reflected in the tax system in the future.
After an intervention by a MP, he said two per cent is an appropriate level for DST despite other countries taxing DMNCs at a higher rate. But he admitted that this is a tax the Government would like to take off the tax code as soon as international agreement on taxing DMNCs is made.
Another MP intervened, to say higher taxes do not bring always a higher tax take.
Norman went on to say OECD has made some good progress on an international solution but the UK wants to take a lead on taxation of DMNCs.
On apportionment, Norman said by taxing revenue overall it will 'sidestep a lot of the temptations that might exist to work around the edges'.
He does not see a GDPR issue with DST.
On double taxation, Norman said it is important to design a proportionate tax with a low rate because we do not want to invoke any double taxation than is absolutely necessary.
Clauses 38-44 were agreed without division.
Clauses 45-50 - Charge to tax
These clauses cover, among other things, the threshold conditions for paying the tax and how to determine how much tax is payable.
The FST opened debate on this set of clauses. He explained that they set out how the DST charge will be calculated. The government aim to ensure the DST is proportionate and only charged to those businesses most able to generate significant value from their users. As such it will only apply to groups with annual global revenues from named services of over £500 million. DST will only be charged on these revenues where they are attributable to UK users and only on amounts above £25 million.
Bridget Phillipson, for Labour, said that, on clause 46, ICAEW has said that due to potential compliance burdens imposed by the DST, it is important to ensure that smaller digital businesses are not burdened by the DST. So the inclusion of a £25 million allowance looks reasonable but should be kept under review.
“On a similar but more general note, CIOT has warned that some businesses may be undertaxed while others may be overtaxed. As we have said before, it is our position on these benches that, in these challenging times, those with the broadest shoulders should bear more of the load.
“Can the minister confirm whether he will keep this measure under review to ensure that all companies, and smaller companies in particular, are not paying more than their larger counterparts, to avoid the distortions which he talked about emerging over time.”
Phillipson then turned to clauses 47 and 48 - ‘safe harbour provisions’. She said it was clear that MNCs are often adept at structuring their operations in a way that reduces their tax liabilities. Are there safeguards in place to ensure that this safe harbour provision is not used for such a purpose, she asked. She noted that clause 48 includes a list of excluded expenses which cannot be deducted from a company’s net profit. This does not include royalties. TaxWatch UK have drawn attention to this, she said, putting royalties ‘at the heart of tax avoidance’. By locating intellectual property in tax havens companies are avoiding UK tax, she said, asking why royalties are not in the list of excluded expenses.
Phillipson also highlighted ICAEW concerns that in spite of the safe harbour provisions, low margin businesses could still face a very high rate of tax on UK allocated profits.
“On clause 49 the Chartered Institute of Taxation has highlighted that the interaction with other national tax regimes with broadly similar but subtly different unilateral taxes, will still mean some double taxation… They describe this as a rough and ready way of reducing such instances, by reducing the revenue chargeable by 50% if it arises from a transaction where a user in respect of a marketplace transaction is normally located in a country which operates a similar tax to the DST. Does the minister agree with their assessment? What analysis has been done in this area? And has there been consideration given to other possible approaches on looking at this issue of reducing the risk of double taxation.”
The FST replied to Phillipson’s comments. Would the £25 million threshold clobber small business? He said having a global revenue base of £500 million and a UK user base of £25 million is a basis which excludes a vast number of small start-ups.
On the ‘safe harbour’ provisions, he said these were designed to ensure DST was not punitive for businesses with low profit margins or losses. He acknowledged that there was a risk at the margin that some businesses might try to reconfigure their activities to qualify for that but he thought it would be clear to HMRC when a business was trying to do this unfairly.
On royalties he pointed out that this tax is based on the consolidated figure of groups as groups. The concern about royalties is usually that they are used within groups to move royalties around.
Clauses 45-50 were agreed without division.
The committee adjourned at 12.43, to resume at 2pm for the afternoon session at clause 51.