By: Tim Bennett
01.11.201
In his latest Budget, the Chancellor announced a new digital services tax. Tim Bennett explains how it works and weighs up its likely impact.
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What is Phillip Hammond’s new “Amazon tax”?
In his Autumn Statement 2018, Chancellor Phillip Hammond announced that the UK would introduce a digital services tax from April 2020. Here is my short guide to what many have dubbed the “Amazon tax”.
Background
Over recent years, complaints have been levelled at the biggest players in the digital economy concerning the amount of tax they pay compared to the revenue and profits they generate. Phillip Hammond has decided that rather than wait for an international agreement on this topic, the UK will press ahead with its own measure.
The Amazon problem
Although it is not the only culprit, much recent ire has been directed at Amazon as an exemplar of the problem. That is largely a function of its size and success.
The issue, however, isn’t its rapid growth per se but rather the perceived unfairness of how little tax it pays to the UK.
How do they do it?
Amazon have been quick to point out that the low level of tax they pay in the UK is not based on any foul play when it comes to tax. They have deployed a number of techniques – all of which are perfectly legal – to bring down their UK tax liabilities. These include booking large volumes of UK sales through a Luxembourg-based entity, Amazon EU Sarl as well as reducing the profits of their UK firm by, for example, paying employees in stock as far as the rules permit.
The wider digital challenge
The issue of where Amazon’s sales and profits should be recorded goes to the heart of the challenge of taxing other global technology giants such as Facebook, Netflix and Google. The issue of determining where and how value is created and therefore where it should be taxed. Simply warehousing goods in the UK, for example, doesn’t qualify as value creation – for a firm like Amazon this lies elsewhere.
The latest Budget
In a bid to land what he estimates could be around £400bn of extra tax revenue here, Phillip Hammond has announced that from April 2020 the UK will levy a 2% tax on digital revenues. This will only apply to large firms with sales of £500m or more and that are already in profit.
Why he has acted now
The Chancellor appears to have seized on the opportunity to tax the tech giants in part because he needs to meet sizeable spending pledges. He can also cite protests from bricks and mortar retailers and public opinion.
The risks
Given the importance of technology development to the UK, this bold move can be seen as brave or foolhardy. Hammond appears to be counting on international agreement around digital services firms and tax before April 2020 or he risks leaving the UK out on something of an anti-tech limb.
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