Philip Hammond made the announcement as he outlined his budget, explaining that while he preferred trying to find a global solution to address the borderless nature of the wealth of the likes of Google and Facebook, negotiations with other countries had been too slow.
He said the tax will be “narrowly-targeted” on the U.K.-generated revenues of specific digital platform business models.
“The rules have simply not kept pace with changing business models,” Hammond said. “And it’s clearly not sustainable, or fair, that digital platform businesses can generate substantial value in the U.K. without paying tax here in respect of that business.”
Companies typically pay their taxes where they are based. But while local governments can impose a sales tax on physical goods in shops and restaurants, that has not been the case with online service providers.
And in the European Union, foreign companies like Amazon, Google and Facebook pay what tax they owe in the country where they have their regional base — usually a low tax haven like Ireland. So their business generates little to no tax revenue in countries, like the U.K., where they have significant operations.
Hammond said the digital sales tax will be structured to apply to “established tech giants” rather than tech startups and was at pains to emphasize that it was “not a online-sales tax on goods ordered over the internet.” It will only apply to firms making 500 million pounds ($640 million) a year in global revenues. The text will come into effect in April 2020 and is forecast to bring in 400 million pounds a year.
Dan Neidle, a partner at law firm Clifford Chance, said the tax could chill innovation and, given the dominance of the tech giants in the United States, would likely be met with a hostile reception by the Trump administration.
“For 100 years, businesses have been taxed based on where they are, not where their customers are,” he said. “The digital tax represents a revolutionary change – it taxes digital companies, regardless of their legal structure, if they have users in the U.K. There are many – particularly in the U.S. — who will regard limiting that revolution to one particular sector as opportunistic, particularly when it’s a sector where the U.K. (and Europe as a whole) have conspicuously failed to create world-beating businesses.”
The announcement came as Hammond splashed out on health services in a spending plan signaling the easing of eight years of austerity with a modest uplift in public spending and few major tax increases.
Hammond declared the end is in sight for the budget cuts implemented by a series of Conservative-led governments after the global financial crisis, reiterating a commitment made by Prime Minister Theresa May this month. But he cautioned that the government’s plans to end austerity could be thrown off track if Britain fails to secure a deal that protects trade with the EU.
Hammond said improving public finances after years of belt-tightening meant he could give government departments a real-terms spending boost next year. Beneficiaries include the Ministry of Defense, which will get an extra 1 billion pounds.
There was also more money for mental-health services and social care, and 1 billion pounds to ease the transition to a simplified benefits system known as Universal Credit. Small businesses got a cut in property tax rates, and workers will see an increase in the amount they can earn before paying income tax.
“Austerity is coming to an end — but discipline will remain,” Hammond said.
The pressure has been on for May’s administration. Government workers and the public have been agitating to end years of austerity that have slashed funding for everything from law and order to schools as May and her predecessor sought to close the budget deficit.
Police are warning they don’t have the resources to fight crime; school principals are marching with demands to help children; and the military is concerned about its eroding ability to defend the nation. Further complicating the picture, the government is pushing ahead with plans to roll out a new comprehensive welfare program that critics say will leave the most vulnerable worse off.
Hammond got some help in meeting the demands from an unexpected increase in tax revenue. The independent Office of Budget Responsibility upgraded its forecast for economic growth in 2019 from 1.3 percent to 1.6 percent, then expects 1.4 percent in 2020 and 2021, 1.5 percent in 2022, and 1.6 percent in 2023.
But Hammond said further specifics on which programs would get more money would have to wait until next year — after Brexit talks are completed. If the negotiations collapse, a no-deal scenario would represent a “very big transition” in the way the economy operates.