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UK budget: Digital services tax set for 2020


Chancellor Philip Hammond has committed the UK to a digital services tax (DST) in the absence of an OECD agreement, turning the rhetoric about an ‘Amazon tax’ into reality.

The UK is set to join a growing list of countries to introduce unilateral tax rules for online platforms. Hammond has justified the decision by saying the big tech companies need to “pay their fair share” at a time when the country needs more tax revenue to fund its public services.

The budget also included some welcome news for businesses as Hammond announced a delay to the off-payroll working rules, known as IR35, until April 2020. In addition, changes to the diverted profits tax rules, permanent establishment definition, VAT registration threshold and VAT group rules were unveiled in accompanying budget documents, as well as a proposal to transpose the EU Anti-tax Avoidance Directive into domestic law.

There was also a sigh of relief among those operating in the North Sea oil industry as the chancellor did not pick their pockets to pay for the planned corporate tax rate cut to 17% by 2020, which is still planned to go ahead and received mixed reactions.

The UK’s digital services tax

The UK’s digital tax plan is to introduce a levy of 2% from April 2020 to raise an estimated £440 million ($560 million) a year. It will apply to organisations with a global turnover of more than £500 million a year and be designed to exclude start-ups. A safe harbour to exempt lossmaking companies and reduce the effective tax rate for businesses with very low-profit margins.

The safe harbour is important given the high-tech sector has given rise to a number of high-revenue, lossmaking platforms. For example, Airbnb has only just marked its first profitable year and it’s unclear if the 2% tax will push the company back into a lossmaking position. Meanwhile, apps like Uber and Deliveroo have yet to turn a profit at all.

However, the UK’s proposal is less than the EU’s interim proposal of a 3% tax on turnover. Nevertheless, the chancellor was quick to clarify that the UK’s DST would not function as a tax on goods sold online, but rather a tax on the gross revenue of the biggest tech companies.

Wendy Nicholls, partner at Grant Thornton, described the decision as “a big shift from all the international tax standards, whereby corporate taxes are based on profits”.

Richard Asquith, global VP of indirect tax at Avalara, warned of the pitfalls of the proposal. “A DST will be difficult to implement practically,” he said. “In taxing turnover instead of profits, it’s economically uncompetitive. It would also require heavy and intrusive data reporting and measurement – it’s not clear if that would get past the new EU GDPR data protection rules.”

“The bigger risk is retaliation from the US which could use tariffs or similar taxes on UK businesses to greater effect,” he added.

Hammond stressed, however, that the UK will continue to work with the OECD and the G20 to reach a global agreement on digital tax. If the OECD comes up with a proposal, the UK will repeal its DST in favour of the global standard.

Catherine Hall, partner at Mazars, observed that the UK has set itself the task of trying to address an international dilemma with local fiscal measures. The first step will be to consult businesses on the fine print of the proposal.

“It will be interesting to see the detail of the consultation document and the proposals put forward and, in particular, whether the tax will hit the targeted digital platform giants or, as with recent anti-avoidance legislation, be far wider reaching with the associated accidental implication,” Hall said.

“However, it’s an issue that is not going away, and there is a strong economic and social case for developing a fair and practical solution for all parties,” she added.

Every country may want a global agreement on digital tax, but clearly not every country can wait for such a global consensus to be established. As Hammond said in his speech to Parliament, the progress on finding such an agreement is “painfully slow”.

Putting IR35 on hold

One piece of good news for businesses was that the postponement of the IR35 changes until April 2020. The government will be holding a consultation with companies and other stakeholders in the meantime.

The decision to extend the IR35 rules to the private sector was not a surprise to Chris Sanger, head of tax policy at EY, who suggested the new timeline gave businesses “some reprieve” over “having to deal with these new rules right at the time the UK was leaving the EU”.

It’s also better for the government. The period between now and April 2020 allows it to address the problems that are present in the current scheme that applies to the public sector, before the new rules are implemented across the UK economy.

“Without this, there is a strong risk that the implementation will be problematic and potentially undermine the availability of the UK’s flexible workforce,” Sanger said.

Meanwhile, others saw the budget as an attempt to ‘buy-off’ core constituents.

“Positive announcements aimed at swing voters were everywhere,” said Jonathan Riley, head of tax at Grant Thornton. “And, where tax is being raised the measures were aimed at larger companies – whether in respect to off payroll workers or even the new digital services tax.”

Cutting corporate tax

One of Hammond’s silent announcements was that the UK will continue to cut its corporate tax rate. The budget document confirms that the UK will reduce the rate from 19% to 17% in 2020. This is after months of speculation that the chancellor was planning to scrap the tax cut in preparation for Brexit.

Heather Self, partner at Blick Rothenberg, was “slightly surprised” to find that the rate cut was not dropped. “The dog that didn’t bark… [the] biggest corporate tax measure is the one that wasn’t announced,” she tweeted. “[Corporation tax] to fall to 17% from 2020 will go ahead.”

The surprise continues a decade of tax cuts. The country had a headline rate of 28% in 2010, and a 17% rate comes at a cost to the Exchequer. Scrapping the rate cut could save an estimated £5 billion a year after 2021.

As Bill Dodwell, senior adviser at the Office of Tax Simplification (OTS), told ITR in the run up to the budget: “Removing the corporation tax cut to 17% and reinvesting some of that money in supporting business investment would still leave the UK as the most competitive G20 economy, whilst raising some much-needed cash.”

At the same time, Hammond made a point of announcing that the oil and gas tax regime would remain unchanged. Before the budget, there was speculation that the UK government might raid North Sea oil to cover the losses of a corporate tax cut.

Diverted profits tax

Much like corporate tax, Hammond did not mention the diverted profits tax (DPT) in his speech, yet his plan includes amendments to the measure.

With effect from October 29 2018, Part 3 of the Finance Act 2015 will be amend to:

  • Close opportunities to amend corporate tax returns after the review period has ended and the DPT time limits have expired (sections 82 to 85, 88 and 93);

  • Clarify that diverted profits will only be taxed under either the diverted profits tax or corporation tax rules, but not both (section 100A);

  • Extend the ‘review period’ that HMRC and taxpayers have to work collaboratively to determine the extent of diverted profits from 12 to 15 months (section 101);

  • Extend a company’s right to amend their corporation tax return during the first 12 months of the extended 15 month review period, but only for the purposes of including the diverted profits into a corporation tax charge; and

  • Clarify that diverted profits liable to the diverted profits tax can be reduced by amending to the company’s corporation tax return during the first 12 months of the review period.

This is just as the UK government sets about implementing the EU’s Anti-Tax Avoidance Directive (ATAD) and reforming its definition of permanent establishment. The chancellor was keen to talk up the UK’s role in cracking down on international tax avoidance.

Even with the digital services tax, the UK may be ready to see more on-shoring as the country continues the race to the bottom in corporate tax and looks to reduce the opportunities for abusive practices.

Photo credit: UK Treasury

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