The UK vowed to press ahead with its plans for a special tax on large technology companies on Thursday, hours after the US threatened to impose trade sanctions on France for similar action.
With UK-US relations already at a low ebb after a transatlantic row over leaked cables from the UK’s ambassador in Washington, ministers ignored US complaints about France and published draft legislation for a new digital services tax from next April, designed to raise £400m a year by 2022.
Treasury ministers and officials were under little illusion that their proposed tax on UK revenues of the likes of Google, Facebook, Apple and Amazon would irritate US president Donald Trump’s administration, but they stuck to their original timetable for the finance bill’s publication.
Jesse Norman, a junior Treasury minister, said: “The UK has always sought to lead in finding an international solution to taxing the digital economy. This targeted and proportionate digital services tax is designed to keep our tax system in this area both fair and competitive, pending a longer term international settlement.”
In response to the overnight US complaints, a Treasury spokesperson added that the UK had wanted “a global or OECD solution” to taxing digital services and would take the matter to the G7 meeting in France next week. “Once an appropriate global solution is in place, we will no longer need our own digital services tax,” the official added.
Nervousness over the US response was heightened after Mr Trump instructed his top trade official to determine whether the French digital tax unfairly targeted US companies under a so-called Section 301 investigation.
This use of this procedure by the US administration last year led to the imposition of tariffs on $250bn of Chinese imports, triggering the US-China trade war.
French senators voted on Thursday to pass the new tax, which will impose a charge of 3 per cent on the turnover of digital companies with revenues of more than €750m globally and €25m in France. It will affect about 30 companies, including US groups Alphabet, Apple, Facebook and Amazon, as well as companies from China, Germany, Spain, the UK and France.
The proposed UK tax is designed to be similar. It applies a 2 per cent levy on the revenues of search engines, social media platforms and online marketplaces serving UK customers.
The tax would be applied only to companies with global revenues in excess of £500m and revenue of £25m from UK activities. Companies with low global profit margins would either pay a lower rate of tax or be exempt if they could demonstrate their operating profit margin on UK business was zero or below.
Mr Norman told MPs the measures would go out for consultation until September 5. He added that the government was making minor modifications to the proposals in respect of cross-border transactions where the other jurisdiction also operated a similar tax. The government also introduced an exemption for financial and payment services from the definition of an online marketplace.
The UK is going it alone in introducing the tax because it became frustrated by the slow progress of international negotiations on taxing digital companies and after European attemptsto agree a joint EU tax failed.
Commenting on the proposals, Giles Derrington, associate director for policy at TechUK, the tech industry body, said it was “deeply concerning” that the government had decided to press ahead after the US investigation into France was announced. While he recognised the need for the tax system to evolve, he said the tax risked “making investing in the UK less attractive, increasing costs for consumers and will probably hinder progress towards a long-term global solution”.
Elsewhere in the draft finance bill, the government confirmed plans to shift the burden of determining whether freelancers should be classified as employees for tax purposes from the individual to the business that employs their services — along with the liability for getting any decision wrong.
The new rules are expected to have an impact on 170,000 individuals working though their own personal services company “who would be employed if engaged directly”, the Treasury said.
In practice, freelance workers fear their clients will classify them as “employed for tax purposes” to limit their liability, meaning income tax and national insurance will be deducted from their pay even though they will not receive benefits that other PAYE workers receive, such as sick pay and holiday pay.
“Many freelancers now risk being pushed into quasi-employment against their will,” said Chris Bryce, chief executive of IPSE, the association of independent professionals and the self-employed. “They’ll be paying into the system like employees, but will be denied any of the protections that go with employment.”
Mr Bryce added that the planned change in April 2020 was too soon for businesses to adjust and said the Treasury was “trying to rush implementation of rules even HMRC itself doesn’t understand”.
The tax rules surrounding off-payroll working, known as IR35, are notoriously complex. At a tax tribunal hearing this week concerning the employment status of Paul Hawksbee, a Talksport radio presenter, Judge Thomas Scott said: “Increased clarity is badly needed”.