The coronavirus pandemic may increase the U.K. public’s support for major tax reform, a think tank suggested, while a tech trade group denied lobbying for the digital services tax to be delayed.
Recent U.K. governments have struggled to deliver substantial reform because of public resistance, but the Johnson administration should “seize the chance” to make sweeping changes, the Institute for Government (IFG) said.
Digital businesses are “increasingly prevalent but harder to tax,” and growing numbers of self-employed people have been more lightly taxed than employees, the IFG noted in an April 14 release. “There are also long-standing, well-known inefficiencies in the tax system and unnecessary distortions, including expensive reliefs which have long outlived their purpose,” it said.
Increased pressure on public spending will require tax increases unless the scale and scope of services is reduced, the IFG argued. “Even before the coronavirus crisis, there appeared to be no public appetite for paring back services; now, there is likely to be support for much more funding for the" National Health Service, it said.
But the government faces an uphill battle to protect tax revenues as changes in consumption and working patterns and the growing importance of digital services undermine existing tax bases, according to the IFG’s report, "Overcoming the Barriers to Tax Reform."
Digital Services Tax
The United Kingdom’s proposed DST features in the delayed finance bill scheduled to be debated by members of Parliament on April 22 if arrangements for debates and votes to “take place in a virtual setting” are approved. The bill provides for the DST to be effective from April 1, but it is not clear how much progress the bill will make before the summer recess.
More clarity and greater understanding about the DST are needed, Chartered Institute of Taxation President Glyn Fullelove said in an April 15 release. “There is welcome detail in the finance bill aimed at assisting how to calculate revenues attributed to U.K. users but businesses will still face significant practical difficulties in identifying the relevant components of what is within the charge to tax,” he said. He welcomed the government’s “commitment to a multilateral solution to taxing digital multinational companies, and the commitment to repeal the DST once an appropriate global solution is in place.”
While some tech companies may be more resilient than other parts of the economy, others face paying the revenue-based DST at a time when they are losing profits because of the coronavirus, Neil Ross, policy manager for techUK, told Tax Notes on April 1. “It’s very much come as our worst-case scenario in the sense that [the legislation is] so broad,” he said. But an HM Treasury spokesperson indicated that there were no plans to suspend its introduction.
Technology companies have played an important role in efforts to combat the coronavirus, but delayed implementation of the DST would “offset a significant chunk” of the amounts companies have donated in cash and kind to governments, according to George Turner, director of TaxWatch, an investigative think tank.
“There appears to be a concerted effort by tech companies to use the coronavirus as an excuse to loosen regulations in a number of countries,” Turner said in an April 14 release that cited the Tax Notes article.
The Times reported on April 14 that Anthony Walker, techUK's deputy CEO, said the scope of the DST was “dramatically extended last month with little warning.” But the newspaper quoted tax experts as saying the scope had not dramatically changed.
Turner noted that The Times itself had criticized techUK’s stance. “Tech companies are . . . flourishing during the pandemic as more business is directed online. Internet marketplaces are struggling to cope with the new levels of interest while retailers are having to step up online advertising,” the newspaper noted in an April 14 editorial. “Companies that do not play fair in these testing times will find that their behavior is not soon forgotten.”
“TechUK has not lobbied government to delay the introduction of DST in response to COVID-19. TechUK remains concerned about the lack of clarity of the U.K. DST potentially capturing a far broader range of U.K. companies,” a spokesperson for the group said in an emailed statement later on April 15.
“TechUK continues to work with government to ensure businesses have the clarity they need. We continue to believe an OECD-level solution is the best outcome,” the spokesperson added. “Our number one priority remains the immediate contribution our sector can make in combating the COVID-19 pandemic and understanding how digital solutions can play their part in our country’s recovery. Hundreds of companies, of which many are techUK members, have already mobilized in support of recovery efforts through offering solutions to the NHS, free services for NHS staff, and [through] ensuring that we remain connected to one another.”
The IFG report noted that while “public opinion is supportive” of the proposed DST, the government has acknowledged that it is “not an ideal solution” to the challenges presented by the digital economy. “Ultimately, the U.K.’s ability to act unilaterally on taxes affecting multinational companies and high-income people depends on other attractions of the U.K. that might outweigh higher taxes; the ease with which companies and individuals can avoid being liable for U.K. tax; and the U.K.’s diplomatic clout relative to other countries that may step in to defend their businesses and tax revenues,” it said.
‘Attention Cascade’
The aftermath of the coronavirus crisis may provide a rare opportunity to address “long-standing weaknesses in the tax system,” the IFG suggested, adding that tax policy is “an area riddled with behavioral biases” among the public and policymakers. “Politicians tend to focus on prominent tax issues (such as outrage at recent proposals for taxing off-payroll working) but place too little weight on slower-burn issues (including long-running weaknesses like the bias in the tax system against being an employee, which incentivizes off-payroll working in the first place),” it said. (Prior coverage of the off-payroll working rules.)
The IFG also noted that some politicians tend to determine their own reaction “based on whether an issue attracts media attention and whether other MPs react.”
“If a chancellor floats the idea of change, he triggers an ‘attention cascade’ — with the focus entirely on the proposed measure. As lobbyists mobilize and headlines denounce the change, the wider reform context can be lost — and ministers invariably back down,” Jill Rutter, IFG senior fellow, said in an April 15 blog post.