News that Chancellor of the Exchequer Philip Hammond is considering an ‘Amazon tax’ for online retailers is further evidence of the pressure on UK Treasury tax receipts caused, among other things, by low corporation tax rates and the huge swing towards internet shopping.
Those who hope that a tougher tax regime will reduce the ability of the internet retail giants to undercut bricks-and-mortar retailers on UK high streets may however be disappointed. As the Chancellor warned, shopping habits are changing and so high streets up and down the country are permanently shifting away from retail with a growing emphasis on leisure, bars and community facilities. And let's be clear, the Chancellor is not proposing to make any changes to the business rates regime which is such a problem for many small retailers.
So whatever tax changes the Chancellor does introduce in his autumn Budget, they are more likely to rescue the Treasury than struggling retailers.
When details of the ‘Amazon tax’ are announced; we’ll be looking for answers to three questions:
- Will the new tax hit its target?
- How much money will it raise?
- How will it be administered?
Based on the UK's performance in areas as diverse as the Google tax (diverted profits tax or DPT, to give the tax its correct name) and fines levied by the Information Commissioner's Office, we won't be surprised if the reality of the new sales tax for online retailers is very different to the expectations raised by the Chancellor.
Let's start with the target of the tax. The Chancellor wants ‘to ensure that taxation is fair between businesses doing business the traditional way and those doing business online’. That's all very well, but what about small retailers which use platforms such as Amazon for part of their sales? And large grocers which run internet businesses from their stores?
Experience of the ‘Google tax’ should stand as a warning for the parliamentary draftsman. Public protests that Google allegedly paid no more than £100m in UK corporation tax during the period 2005 – 2014, when its UK revenues amounted to some £24bn, lay behind the introduction of the DPT. In fact, Google does not seem to be caught by the DPT. Following an agreement with HMRC, Google paid UK corporation tax of £49.3m on all of its UK profits for the year ended June 2017. By contrast, drinks group Diageo found itself with a £107m bill for DPT, which it is contesting.
When it comes to amounts, during 2017/18 HMRC raised £219m by issuing DPT charging notices. These notices were sent to 22 companies. In addition, HMRC estimates that behavioural changes by companies in response to DPT brought in a further £169m of corporation tax. That's a total of £388m, slightly ahead of earlier estimates of £360m. This sounds like a lot of money, but with DPT charging notices averaging only £10m per company, the figures seem completely out of line with the perceived scale of the problem.
Other countries take a much tougher approach. Nowhere is this more evident than in respect of the Facebook/Cambridge Analytica furore. It is reported that the UK Information Commissioner's Office fined Facebook £500,000 (the maximum permitted before GDPR) for its part in the scandal. By contrast, in the USA the Federal Trade Commission is expected to fine Facebook around $5bn. If the UK Treasury is serious about tackling unacceptable tax practices by online retailers, then it has to be equally serious about the amounts of tax which it is prepared to pursue.
This brings us to the administration of the tax. From the perspective of a tax authority, DPT is almost the perfect tax. It's entirely self-contained. The company in question has to report itself to HMRC within three months or face hefty tax-linked penalties. Once HMRC has issued a charging notice, the tax has to be paid within 30 days. Payment cannot be postponed even if the company appeals. Critics argue that, by effectively outsourcing compliance to the company, HMRC finds itself in a relatively comfortable position and does not have to go after companies through any form of investigation. With DPT applying only from 1 April 2015, it's too early to judge whether those criticisms are valid. As things stand, it's likely that the new sales tax on online retailers will operate in a similar way, but will it target the right retailers; and what will be the knock-on effect on smaller traders?