Neil O’Brien: We need small business to reap the benefits from a big tech tax
It’s not going to be easy to get big tech to pay their fairer share of tax. Here’s how Philip Hammond can make it a success, writes Neil O’Brien
It was great to hear Philip Hammond announce at Conservative party conference that the Government will introduce a new tax on large digital businesses.
The tech giants we are all familiar with are hugely profitable and are reshaping pretty much every other industry – and indeed the face of our high streets.
I’m often asked by small businesses in my constituency whether big tech firms should be paying a fairer share of tax so that we can cut taxes they’re facing like business rates. They feel that the big digital firms are able to minimise their tax bills in a way that small players like them never could.
They have a point. International tax treaties were designed in an era where doing business in another country meant having a physical presence there.
But today a tech firm can sell advertising to firms in country A, to be seen by users in country B, running on servers in country C, under a brand owned in country D which is owned and financed by a parent firm in country E, and then make sure their profits are realised wherever tax is lowest.
Take an example cited by the journalist Jonathan Ford. In 2014, Google made £4.3bn of sales in the UK. In line with a global profit margin of 26%, that would have made £1.1bn of profits to pay tax on, and corporation tax payment of up to £220m. Instead, they only paid £30m because profits were realised elsewhere.
The government has started to level the playing field since then. For starters, ministers brought in a tax on diverted profits, the so-called “Google Tax”. But more and more business will be done online, so our tax system must keep up.
Recent months have also seen the OECD and European Commission come forward with discussion papers on how to tax the digital economy, and Britain has been leading the international debate, with two papers from the Treasury consulting on a new tax on the tech giants.
It’s not going to be easy to get big tech to pay more. While some EU members support a new approach, others like Ireland remain strongly against. Outside Europe, there’s even less agreement.
So, Britain and maybe the EU, will have to go it alone. Here’s how to make it a success.
First, a new tax must be for the largest international business only, with generous allowances to carve out small firms. We don’t want to do anything to hamper Britain’s vibrant tech start-up scene, and for tech minnows, the administration costs would outweigh the tax collected.
Second, we need a tax with a very clear distinction between tech and other international businesses. Selling advertising on a British newspaper website is no different to selling ads in a physical paper: the value is still being created by the people who write the newspaper, not the readers, even if they are in another country.
But if I in Britain post a video or a song I made on a social media site (even if it is ultimately owned in some tropical tax haven) then I am not just the customer, but also one of the users creating the value and profit (along with the engineers who maintain it). So, the value creation and tax due should be here in Britain.
Finally, we need small business to reap the benefits from a big tech tax. I’m proud we have helped hard-working people in small businesses by cutting corporation tax and taking lots of high street firms out of business rates. But we must do more.
Realistically, a tech tax is unlikely to raise more than hundreds of millions a year. That’s not huge in the grand scheme of government spending, but enough to level the playing field and allow government to cut tax for small business.
I hope that in the Budget on 29 October the Chancellor will stand up and crack on with a reform that will make our tax system fairer and help the high street.
Neil O’Brien is Conservative MP for Harborough