Home Business Insights & Advice How will HMRC’s crackdown on “Google Tax” impact London’s tech scene?

How will HMRC’s crackdown on “Google Tax” impact London’s tech scene?

by Sarah Dunsby
30th Nov 18 7:55 am

British policymakers are taking on Silicon Valley’s tech behemoths in a bid to squeeze more tax out of some of the world’s wealthiest companies.

Tory Chancellor, Phillip Hammond has jumped ahead of EU courts to call on the likes of Google, Facebook, Apple and Amazon to pay their fair share of taxes.

America’s tech giants have been evading tax for years in Britain. A public outcry prompted the Treasury to introduce new levy’s on the Diverted Profits Tax (DPT) in 2015 was dubbed by the British media, “Google Tax”

Under DPT laws, the firms are obligated to pay corporation tax at 25% as opposed to the usual 20%. The new clause applies an additional two per cent levy on revenues earned from the activities of UK consumers using search engines, social media networks and eCommerce platforms.

The new tax is expected to raise an additional £1.5bn over four years, but at what cost to the future of tech start-ups investing in the UK?

London is arguably Europe’s biggest tech hub. Silicon Valley’s Big Four have multi-million-dollar investments in the UK, and some commentators are worried the new tax levy’s may dissuade smaller foreign firms to plough money into the UK.

Sources inside the legal and accounting system reveal the real problem is not how the law effects the multi-billion dollar foreign-owned companies it is designed to target, but how HMRC is applying the legislation to target UK firms.

HMRC aggressively pursuing UK companies

The intention behind the DPT is to prevent multi-national companies from ferrying tax dollars to offshore bank accounts in order to avoid paying corporation tax.

For example, Google uses sales staff stationed in Ireland to sell advertising to the UK market. Because sales are processed in Ireland, the tech giant has no legal obligation to pay tax on profits even though they originate from UK firms.

It has now come to light that HM Revenues and Customs (HMRC) has been using the legislation to investigate the tax planning of British companies that are suspected of underpaying corporation tax.

Companies are obligated to inform the tax authorities if they anticipate their annual revenues will fall under the scope of DPT laws. However, HMRC is aggressively pursuing suspected UK businesses with a charging notice giving them 30 days to pay.

Tax advisors close to British companies that have received a notification letter say that DPT is being applied to more businesses than you would expect. UK groups, rather than foreign-owned multinationals, are suffering most under DPT regulations.

Philip Baker QC, the barrister responsible for drafting the initial DPT document in 2015 has been in contact with firms asking for evidence of HMRC “mission creeping”.

HMRC’s increasingly aggressive attitude towards UK companies is causing chaos in the tax departments across the country. Accountants and legal teams are sitting in on meetings to structure acceptable tax planning.

How does DPT affect tech start-ups? 

The UK Treasury claims there is a “safe harbour” to protect smaller firms. The threshold for tax levies will only apply to firms that earned more than £500 million in global sales.

The legislation also exempts the first £25 million in revenue. Furthermore, the rules do not apply to online sales tax, but income earned through data collected from users together with advertising revenue and commission charged by online marketplaces.

Although the promise of a safeguard was an attempt to ease fears that tech start-ups and other companies would be affected by DPT, HMRC has turned the screw by using country-by-country reporting data to support its risk assessment process.

Official statistics reveal the tax office has been successful in generating higher yields from DPT, and the Tax Journal say the number of notifications increased from 48 in 2015/16 to 220 in 2017/18.

The tactics employed by HMRC have been described as a potential “game-changer” which could hamper small businesses in the UK. Furthermore, the UK’s DPT could have a long-term impact on international tax policy.

Legal firms specialising in corporation tax warned British companies that HMRC will use DPT to argue that tax planning has been structured to avoid tax obligations even if there is a commercial driver.

Whilst the avoidance of corporation tax is a matter of concern, abuse of authoritative powers is not what laws are designed for.

Companies need to be transparent about their transactions, but policy makers also need to be transparent about how regulations will be enforced so companies have the chance to conduct appropriate financial planning within the scope of tax regulations.

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