In cricket you can be out if you are judged to have ‘hit the ball twice’ – it is an incredibly rare form of dismissal and the last time it happened in first class English cricket was in 1906. So you may wonder why it is still included in the rules. The answer is of course that without such a rule players might well be tempted to hit the ball twice. The very fact that the rule is almost never invoked is a sign of just how effective it is.
The tax system has features which are a bit like this – rules which are not intended to raise much in the way of tax but to stop people doing things which are regarded as objectionable. The personal service company rules (IR35) are, for example, as much about stopping people forming personal service companies as they are about raising tax.
The so-called ‘Google tax’ (strictly the diverted profits tax, DPT) falls into this category. In an ideal world the government would be delighted if no DPT was collected, because it would mean that no profits had been diverted abroad. (That it is an over-simplistic analysis but the principle is clear.) In 2017/18 receipts were £388m up by 38 per cent from 2016/17 (£281m). So, is this a good or bad thing? And does this mean that the policy has failed?
The position is more complex. DPT’s real function is to force companies to address their transfer pricing policies and international structures. Companies have to pay DTP up front but then have a year, in most cases, to agree a transfer pricing adjustment with HMRC. If they do then the DPT paid is set against the additional corporation tax which is due.
The additional revenue which HMRC collected from transfer pricing adjustments in 2017/18 was £1.7bn – a much more significant amount than that raised by DPT. So, we may be seeing a timing effect here. The real prize for HMRC is securing realistic transfer pricing – because this will bring structural increases in the tax take. These take time to agree and in the shorter term DPT is acting as a lever to force companies to address their transfer pricing and international structuring.
So, even if DPT receipts tailed off to Nil the tax would almost certainly not be abolished, for the same reason as the MCC has not abolished the hit the ball twice rule. The fact that nobody has been out under the rule since 1906 is evidence that it is working. But could a future chancellor stand up and say with pride that for the 100th year running no DPT had been collected? I wouldn’t hold your breath!