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Philip Hammond's push to tax Big Tech - how does it work and who will it affect?

tech tax
The Treasury said the levy would continue to apply to digital companies generating more than £500m in global revenue, and more than £25m from the UK

It has been years in the planning and Treasury mandarins have spent months agonising over how best to make it fly without shaking confidence in the UK’s reputation as a technology hub.

But when Philip Hammond finally unveiled his long-awaited digital services tax it was overshadowed by something else: a transatlantic spat between Donald Trump and French plans for a similar tax on Silicon Valley.

Such levies “unfairly target American companies” such as Facebook, Amazon and Google, said Robert Lighthizer, US Trade Representative, of France’s move to approve a tech tax. It prompted Washington to kick off an investigation into the proposals, and paved the way for the US to issue retaliatory tariffs against France.

Apparently undeterred, the rhetoric from Washington DC did not prevent Philip Hammond from pushing ahead with his own plans. HM Treasury released the draft legislation for a UK digital services tax as well as a response to the consultation into the levy.

“There is clearly no appetite at present from the UK government to shelve the proposals pending wider global coordination,” Matthew Herrington, from KPMG, said.

Businesses across the globe have been watching closely. For months, the question on the lips of many executives has been how would the Government seek to trim down the types of company affected by the planned 2pc tax. Previously, it had said they would include “social networks, search engines and marketplaces”.

But four months after its consultation into the tax came to an end, on this, the Treasury offered little clarification.

There were a few exceptions. Any businesses which “stream, broadcast or publish media like film or music” would naturally not fall in the tax’s scope, it said, a sign that Netflix or Spotify were likely to be excluded. Most video gaming businesses, where players can interact with each other over chat platforms, were also expected to be spared.

And a special exemption was brought in for financial services business, which the Government said could “potentially overlap with the marketplace definition”, given they facilitate the trading of financial assets.

In truth, Chris Sanger at EY said, this was mostly “akin to what they had started saying when they designed this tax”, but there was, in some areas, “another level of detail which is beyond where the Treasury had set out its position before”.

By and large, though, the bare bones of the tax remained unchanged – the Treasury said the levy would continue to apply to digital companies generating more than £500m in global revenue, and more than £25m from the UK from advertising, facilitating transactions and subscription fees.

But, given the heightened US focus, the release of documents is likely to be seen as a clear sign that the Treasury would not be backing down, at least as long as Hammond remains Chancellor.

It’s not really surprising. For years, questions have been asked over why internet titans such as Google, Facebook and Amazon pay such little tax in the UK compared to British businesses including Asda and Marks & Spencer’s.

The simple answer is that, whilst those companies are all generating cash in the UK, for the Silicon Valley giants, those sales are often booked through overseas holding companies.

This is “clearly not sustainable, or fair, that digital platform businesses can generate substantial value in the UK without paying tax here in respect of that business,” Hammond said last year. And, so the wheels were put in motion for a digital services tax.

But, still, going forward with the tax does not come without its issues. For one thing, the CBI had already warned it could make the UK “even more isolated” on the international scene – something the US pressure this week has made clearer.

It isn’t just a US-UK issue either, lobby group TechUK says.

It also “risks creating an outcome where UK-based tech firms actually end up paying more tax than their international competitors,” policy chief Giles Derrington said.

Concerns over how British businesses would be treated under this tax have been mounting since proposals were tabled, but, in the latest documents, no relief was forthcoming.

“They’ve talked about this as a tax aimed at the global multinationals, but what they’ve ended up with is a system which actually potentially ends up disadvantaging UK companies,” Derrington says, given those companies would also continue to pay higher corporation tax.

For takeaway company Just Eat, the update is likely to come as a particular disappointment. In recent months, it has been lobbying hard to secure some protections against the tax as “the only listed European internet business with revenues close to the threshold”, according to analysts.

But, it is far from alone in having warned the Government against implementing it. In the Treasury documents, Rightmove, MoneySupermarket, Match.com and Secret Escapes are all named as having submitted their responses to the consultation – even as some of them haven’t hit the thresholds yet and are not for definite in the scope.

Do you agree with the plans to tax Big Tech? Or, do you believe it could be bad for British firms? Tell us in the comments below