November 14th, 2018

The Chancellor’s tax on tech is the right diagnosis, but the wrong prescription

As published in The Telegraph 10th November 2018

While the last year has been one of the most successful ever for the UK’s fast-growing tech sector on the international stage, the industry has also faced a ferocious backlash at home.

From the disgraceful conduct at Cambridge Analytica to legal challenges to the rights of gig-economy workers, big tech has rightly been in the spotlight. Last week’s move by Chancellor Philip Hammond to introduce a new tax on the revenues of digital businesses was a logical consequence of the year’s prevailing view that some tech companies aren’t paying their fair share.

Hammond plans to impose a 2% tax on the revenues of Google, Amazon, Facebook and other companies with global revenues of at least £500m, in what he hopes will be an initiative followed by other nations.

Seizing the thorny issue of multinational taxation isn’t easy, and the Chancellor should be applauded for taking a lead while the EU and OECD still continue to discuss it. But targeting the technology industry so bluntly, and at a time when the UK’s own software industry is seeing such strong momentum, could result in this tech tax ending up as a tax on British innovation.

The UK should be putting greater effort into revising tax codes and leading the way in creating positive regulation of these new business models, not treating them like the oil barons of yesteryear.

Our post-war tax system was developed in a world of big industry, car manufacturing and steel works. Companies had to have a significant physical presence in a country to generate sales there. Yet as more of the UK economy has been driven by services and now software, a corporation tax based on where profits are generated is becoming as relevant as the abacus they were initially calculated on.

Where exactly in the UK is revenue generated when a French company pays for advertising to be shown to a British user who sees it through a mobile connection delivered via a web server in California? Working that out alone is going to be a multi-million pound headache for HMRC.

That tax laws are out of date is news to no-one, and as Margaret Hodge MP rightly pointed out in 2012, tech companies aren’t being accused of being illegal but rather immoral.

But the technology companies identified by the Chancellor are hardly alone in this approach to taxation. Why have a special tax for Spotify or Booking.com, which are hugely popular services in a fiercely competitive market, and not for international pharmaceutical companies and offshore funds?

The Sun declared the new tax would "put the bite on tech giants sucking the lifeblood from British high streets”. But the advantages companies like Amazon have over UK retailers like Tesco isn’t their profit margins but the user experience. Shoppers are voting with their feet, or rather their clicks, whatever their budget. All a tax will do is raise prices for consumers, not protect the corner shop. Google has already hinted that the tax might lead it to put a price on its mobile operating system, Android. Starting a tit-for-tat on tech tariffs will only be bad for UK consumers.

If anything the rise of new platforms like Instagram, Amazon and Google has unleashed a new generation of entrepreneurs, giving them access to customers at a fraction of the cost they would have to bare a decade ago. If prices are raised it is the young bloggers who rely on Facebook, the new brands who rely on Amazon and Instagram, and the small businesses that rely on Google that will be punished. These newcomers would never have got shelf space in a supermarket or column inches in a newspaper a decade ago.

The broader message that technology companies will be treated differently is a dangerous one to send at a time when the UK is finally beginning to compete on a global scale, producing tech companies like Zoopla, Revolut and Farfetch, with a world-wide presence. In the last decade alone, London has been home to the creation of more multi-billion dollar companies, so called unicorns, than anywhere else in Europe. Manchester has created more such companies than Paris, and the technology ecosystem has been blossoming from Edinburgh to Essex.

The UK has long been criticised as a society where risk taking is chastised compared to the US. If we focus too much on the negatives on these new tech platforms, we risk alienating a new generation of entrepreneurs just as the UK is seeing breakthroughs on a global stage.

There are many other useful ways in which Britain can exert leadership in the tech sector. By requiring stronger rights for workers in the gig economy, we could ensure companies like Uber and Deliveroo provide meaningful work and great service. By demanding that Google and Apple make the data they capture on UK users more transparent, we could improve people’s understanding of the apps they use. By working with Amazon and Facebook to take on apprentices we could increase the number and quality of the next generation of British engineers.

There are many other routes to fixing the challenges that big tech companies pose but if we are to keep our place at the forefront of Europe’s tech sector, we should be able to come up with a more innovative solution that reflects an entrepreneurial, tech-driven economy. Gerrymandering new business models into outmoded tax law is doomed to fail.