(6 years ago)
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Neil O’Brien (Harborough) (Con)
I beg to move,
That this House has considered digital taxation.
It is a pleasure to serve under your chairmanship, Dame Cheryl. Let me start by thanking all hon. Members who have come to take part in the debate. I feel we have a slight imbalance of forces in the Chamber, but none the less it shows the high level of interest in the subject.
My interest in it comes from talking to the small businesses in my constituency. Those Members who know my constituency well will know it is not a place with one large or dominant employer or sector but a place of very successful small businesses. We have wonderful independent shops in Market Harborough and on Bell Street in Wigston, we have fantastic manufacturing businesses such as COBA in Fleckney, which I visited the other day, and we have great high-tech businesses, particularly around Kenilworth Drive in Oadby. A lot of small businesspeople ask me, “We are paying our business rates and taxes, but are large international digital businesses paying their fair share of tax?” We need to ensure that the answer is an unambiguous yes.
This debate is timely. At the time of the spring statement, we saw the Treasury publish its position paper, “Corporate tax and the digital economy,” and since then the OECD has produced a report on the same issue as part of the work on base erosion and profit shifting that the UK has led on and, just last week, the European Commission published a paper on the same subject. It is significant that both the European Commission and the Treasury have independently arrived at some similar conclusions. In fact, both the Treasury paper and the European Commission put forward two options: a comprehensive international reform, or an interim tax to be levied before such a reform can be agreed internationally.
It is clear from reading all of those documents that taxing large digital businesses and distinguishing them from other firms that trade internationally is not simple or straightforward at all. None the less, I was encouraged to see the Treasury consulting on that question and being prepared to think radically about what we need to do to address it.
What is the case for action? Put simply, international tax treaties were designed in an era when doing business internationally inevitably meant having to have physical premises, offices, factories and lots of people in the country where business was to be done. However, today things are different. A large digital business could sell advertising to firms in country A, to be seen by users in country B, served off servers in country C, perhaps under a brand owned in country D, which is financed and owned by a company in country E. That business can ensure that its profits are booked in whichever jurisdiction taxes are lowest.
That is the issue in abstract; let me give a concrete example. I do not want to pick on a particular business, but I use the example cited by Jonathan Ford in the Financial Times relating to Google in 2014. He reported that the firm had made about £4.3 billion of sales in the UK and that, in line with its global profit margin of about 26%, that would have meant about £1.1 billion of profits to pay tax on—and, in turn, a corporation tax payment of £220 million. However, he reports that in that year it paid only £30 million in corporation tax.
A simple division of Google’s global profits by its share of users in the UK would not be a fair basis to work out its tax liability here, because obviously a large proportion of its engineers and research and development are in the US. None the less, it feels like we might expect a bit more of the value created by UK users to be reflected in taxable value in the UK.
Since 2014, things have moved on. We have seen the introduction of the so-called Google tax to stop some of the worst abuses of the international system, stopping firms from artificially signing all of their contracts in a particular country, and looking through some of the artificial arrangements put in place by some firms. However, there is much more to do.
In fact, this issue is far from unique to the UK. The European Commission reports that digital companies pay on average roughly half the effective tax rate of firms in the traditional economy. A revealing map in the Commission’s impact assessment shows very little correlation between where digital businesses’ user activity is and where in Europe their profits are booked. In other words, there is no real link between where value is being created and where tax is being paid. It is therefore absolutely right that the Treasury is consulting on going further.
That is the case for action. Our approach should be guided by three principles. First, any new tax has to be for the largest international businesses only, with generous allowances to carve out small firms. We do not want to do anything to hamper the vibrant tech start-up scene we have in the UK, and it would make no sense to try to impose a large and complex tax on minnow-sized companies where the cost of administration would outweigh the benefit of the tax we might collect. I was glad to see a nod in the direction of carving out smaller firms in the Treasury paper, if I have interpreted it right.
Secondly, we need a tax that has a clear distinction between tech businesses and other international firms. We do not want to unravel the complex web of global tax agreements we have at the moment or come up with something that can never be agreed internationally. We need to distinguish between tech and other sectors. Let me give an example. There is no real difference between selling advertising on a British newspaper website or a popular blog and selling it in a physical newspaper—the value is still created by the journalists based in the UK. If, on the other hand, I post a video I have made or a song I have recorded—many Members will be horrified by the idea of listening to me singing—even if that website is ultimately owned in some tropical tax haven, I have created the value in the UK, and it is right that the profits should be booked here and taxes paid here. The emphasis in the Treasury’s paper on the concept of user-created value is the right way to make that distinction.
Thirdly, we need small businesses to reap the benefits from any new tax on large digital firms. I am proud that we have helped hard-working people in the small firms in my constituency by reducing corporation tax and taking large numbers of small firms out of business rates altogether, but many still do pay a lot and it would be good to be able to go further.
Realistically, a new tax on large tech firms is unlikely to raise more than a few hundreds of millions of pounds, which is not a huge amount in the grand scheme of Government spending but none the less enough to help level the playing field a bit and allow the Government to do more to cut tax on small businesses. For example, the Government recently allocated £25 million to reduce business rates for small pubs, which has been a huge help to many of them. If we could raise more from large tech firms, we could do even more of that.
Those are the principles. Let me turn to the detail of how we might implement such a tax. There are a number of important decisions to make about its design. First, what should we be trying to tax? The clear principle we must push for internationally is that a business’s profits should be taxed in the countries where the value is created. At present, the accounting profits are simply too easy to move to a low-tax jurisdiction. Some in the media have talked about a tax on sales, but ultimately they are not a good proxy for value being added. Sales overseas are far from unique to digital businesses, and the idea of sales is not necessarily easy to define for businesses that have a free-to-use model. The Government are right to focus on the core concept of user-created value. What kinds of businesses does that mean we should try to tax? It means the free-to-use services that many of us use, be they search engines, social networks, app stores or online marketplaces; I am sure we could all name firms in all those categories. Those online platforms are not like other kinds of businesses, which perhaps create or store a bit of data on their customers; they are platforms substantially made up of user-generated content or have very valuable data from deep engagement with their users.
It is sometimes said online that with some of these businesses, “If you aren’t the customer, then you are the product.” Personally, I would put it more positively: the users are both the producers and the consumers for those new types of business. The European Commission uses the rather ugly word “prosumers” to describe that business model. That new business model is the reason why the tax system now needs to change to keep up.
The third question of detail is how exactly to design a tax on that new category of business. There is a distinction to be made between the ideal international agreement and something we could implement in the nearer term. Looking to an international agreement, I note that the Treasury’s paper talks about allocating,
“a share of the profits of the principal companies after routine functions in the group have been remunerated with an arm’s length return. That share would be designed to approximate the value that users generate for the business.”
That is simultaneously the right thing to be taxing, and something that will be quite an art to determine. I will give a couple of examples of the complexities here. The Treasury paper includes a discussion of the different kinds of value created by more or less active users and the issues created by users who cross borders regularly. It also explores some of the potential avoidance measures that firms might be tempted to take.
Looking at the positions that different Governments around the world are taking on this question, it seems unlikely that a new global agreement will be reached soon. Both the Commission and Treasury papers talk about a simpler interim tax on revenues in the meantime, which I think it is right for us to consider despite the difficulties of revenue-based taxes. The Commission paper talks about three types of revenues that would be taxed—revenues from selling online advertising, from digital marketplaces and from the sale of user-provided information. The Treasury’s paper has a similar range of options on the design of a tax: types of business, types of activity or a hybrid of the two. Personally, I think types of activity looks like the simplest option, but any of them could potentially work.
Finally, questions arise about what rate we might reasonably set, how much a tax could raise and who would be paying such a tax. A study by the United Nations of the largest 100 digital businesses in the world suggests that around two thirds of them are based in the United States, compared to only one fifth of other multinationals. We might expect such a levy to fall mainly on US-based firms. The European Commission in its paper goes a little further than the Treasury and sets out some potential thresholds and rates; it suggests taxing firms with worldwide revenues of over €750 million and European Union revenues of €50 million. There are, of course, very few firms with revenues on that scale. To me it feels as though that is the scale of businesses we should be aiming to tax.
Nick Boles (Grantham and Stamford) (Con)
I congratulate my hon. Friend on securing this debate. This is an important, interesting and tricky subject, and one that we need to take a good long run-up to, so it is exactly the kind of debate we should be holding. He seems to be addressing mainly the question of how to make corporation tax, the historic tax on profits, work in a new age with these new kinds of businesses. Does he not feel that we should also be thinking about what is happening to the property taxes we have historically raised from business, and our likely need to replace business rates as a source of revenue? Rather than just fixing the profit tax, which he seems to be mainly suggesting, should we also be thinking about whether we might use whatever new tax base and taxing mechanism is created to also replace some of the property tax that businesses currently pay?
Dame Cheryl Gillan (in the Chair)
Order. I am delighted to welcome the hon. Gentleman back to Westminster Hall for, I think, the first time in two years. I will just remind him that interventions need to be short.
Neil O’Brien
I thank my hon. Friend for his thoughtful contribution. I agree that there are a number of different aspects of the tax system that are no longer very buoyant and need to be modernised. He picks on one that is perhaps a debate for another day, but none the less an important one.
Coming back to my point, few businesses would be affected by a tax with the kind of carve-outs that the European Commission is talking about. I hope that similarly, when a detailed proposal comes from the Treasury, we will also see a generous carve-out for smaller businesses. To give a sense of the difference it makes, I note in the Commission’s impact assessment that reducing the threshold for inclusion from €750 million to €500 million would double the number of firms affected and caught up by such a tax, but only raise revenues received by 7%—a lot more bureaucracy for not a lot of gain. That suggests to me that a focus on the very largest players is the right one.
On that basis, and on that base, the Commission suggests a 3% tax on revenues of those kinds, which it believes would raise around €5 billion a year across the EU as a whole. That would potentially mean hundreds of millions of pounds in the UK if we did something similar. As the Treasury moves towards making its own decisions on setting rates and thresholds, I am sure the Minister will be thinking about the same considerations and thinking about how a UK tax might fit alongside an EU one, if the EU ends up with a consensus to take action.
To conclude, while a new tax on large digital businesses might not raise vast sums, it could raise enough to make a substantial difference to small businesses in my constituency. It would be a welcome addition to the raft of anti-avoidance measures that we have seen in recent years—over 100 measures now, raising over £175 billion since 2010 alone—and if we can get those large, digital businesses to pay a fairer share of tax, we can go further in cutting the taxes small businesses pay, such as doubling the small business rate relief we have seen and extra help for small shops and pubs on top of that.
To get big tech to pay a fair share of tax, it seems to me that the Treasury is gearing up to propose some pretty bold and unconventional measures. I am sure some people and some firms will come out to oppose that, but given that we have completely new business models changing our economy and a clear case for reform, Ministers should be bold and I encourage them to go for it.
Damien Moore (Southport) (Con)
As a member of the Science and Technology Committee, I am delighted to contribute to this debate and champion the transition to a digital form of taxation. The issue here is not only the businesses that we will be looking to tax, but the form that our taxation regime takes. Far too often, Governments are slow to modernise and adapt to the times, and I am glad to see that my colleagues in the Treasury have chosen to focus their attention on this area. I will follow the results with great interest.
Although I would never encourage digitalisation simply for its own sake, developments over the last five years have made the creation of a workable, transitional period leading to digital taxation an absolute necessity. We live in an age when cryptocurrencies, challenger banks and blockchain technology are taking off, while e-commerce continues its shake-up of the retail sector. Furthermore, the closure of local bank branches en masse around the country has resulted in individuals having to adapt to a rapidly changing pecuniary landscape. Her Majesty’s Revenue and Customs can and must keep pace with the innovations of Silicon Valley and Tech City, as more and more tech companies enter the financial arena.
From a purely practical standpoint, the current annual system of tax returns is an administrative burden and an overly lengthy process for businesses. The programme of reforms will contribute to the HMRC target of reducing tax administration costs by £400 million by the year ending 2019-20. The old system was far too complex, and businesses would often only know their tax liabilities at the end of a financial year, which imposed uncertainty on them and ultimately prevented them from planning for the future.
As I understand it, by 2020, businesses, self-employed individuals and landlords will have the option of keeping track of their tax affairs digitally, updating HMRC at least quarterly via their digital account. Those quarterly updates will not amount to four separate tax returns in a year, despite a degree of uncertainty on that point. The Government have assured us that bureaucracy and constant form-filling will become a thing of the past, with the information that HMRC requires being automatically uploaded on to people’s digital accounts.
Businesses will be required to use the Making Tax Digital for Business system only from April 2019, and even then only to meet their VAT obligations. That will apply to businesses with a turnover above the VAT threshold; the smallest businesses will not be required to use the system, although they can choose to participate voluntarily. I believe that businesses with a turnover of below the £85,000 VAT threshold can also be great beneficiaries of digital taxation, and I hope the Government will give a lot of thought to the bespoke and innovative ways in which small businesses will be able to engage with these new foundations of tax.
Currently, most taxpayers cannot see a single picture of their liabilities and entitlements in one place. However, by 2020 customers will be able to see a comprehensive financial picture of their digital account, as they can with their online banking. HMRC customers and their agents will be able to interact with HMRC digitally and at their convenience. They already have access to a digital account, which will allow them to access an increasingly personalised picture of their tax affairs, along with prompts, advice and support through webchat and secure messaging. Digital record-keeping software will be synced with HMRC’s systems, allowing customers to exchange information directly from their software. I welcome these innovations and can see the utilisation of this system eventually being as natural as online banking.
The Government have said that they will not widen the scope of Making Tax Digital beyond VAT before the system has been shown to work well. I, for one, will be following the development of the programme throughout its implementation, with the expectation that this change will result in the desired outcomes. There will inevitably be some kinks in the system, and I hope that they will be ironed out. However, make no mistake: this is a progressive move that will encourage greater engagement with HMRC, save both the Government and the taxpayer money and ensure that businesses, whatever their size, are not shackled by bureaucracy and burdened by paperwork.
Robert Courts (Witney) (Con)
It is a pleasure to serve under your chairmanship, Dame Cheryl.
I start by congratulating my hon. Friend the Member for Harborough (Neil O'Brien) on bringing about this extremely important and timely debate. I know that many points will be made that reflect the strength of feeling in our own constituencies, as well as points about what we will look for from the Government in due course. I declare an interest at the outset as the chair of the all-party parliamentary group for small and micro business.
Online businesses are growing rapidly and will continue to do so. I think we probably all agree that, as that happens, our tax system must catch up. As my hon. Friend said, international tax treaties and much of our domestic tax system were designed in an era when doing business necessitated having a physical presence. Large tech companies are able to create large, complex international tax structures to keep their taxes as low as possible, at the same time as their businesses stretch across borders. Small businesses in west Oxfordshire often ask me whether those large companies, which now take up so much of the market, are paying their fair share of tax. It is a real sore point and a bone of contention for small businesses that are required to have a concrete, bricks-and-mortar presence when many larger companies do not.
Independent high street shops, trading from brick-and-mortar premises, are now competing, in a very real sense, against large online companies that do not pay the same business rates in particular, because they do not have that same physical high street presence. Moreover, large companies can absorb the costs of bureaucracy and overheads—the costs involved in all businesses—much more because they have a larger presence but without the physical footprint.
Small businesses do not have international structures, and they do not have teams of expensive accountants and lawyers to help them to make the system work for them. In many cases they are run by a husband and wife, a father and son or members of a family who have owned a business for years and still work every hour God sends to make it work. The role of Government is therefore to help to level the playing field, to make sure that these engines of our economy and these jewels of our high street are able to compete with the large multinational companies on the internet.
We can all agree that we want our high streets to remain vibrant, buzzing and full of different businesses that sell, make and create all sorts of different products and jobs. I am particularly reminded of that every time I spend a day in my constituency in west Oxfordshire, or when I go around the streets of Witney or Chipping Norton or Woodstock. I know that the shadow Chancellor has a red book that he likes to illustrate his points with. I also have a red book that I will illustrate my point with. I can see the alarm on the Minister’s face as he wonders precisely which red book I am about to brandish, but it is a leaflet for the west Oxfordshire business awards 2018, which I attended last Friday night.
There are an extraordinary number of businesses in west Oxfordshire that do wonderful work, covering everything under the sun that one could possibly imagine: coffee, children’s clothing, travel, gardening and speciality milkshakes—who would have thought it? That is only the finalists for this year’s competition. Hundreds of others were not listed as finalists, and hundreds were listed last year or the year before.
If ever there was an illustration of quite why it is important that the Government pursue the business-friendly policies that they do, it is contained in this little red book—this bible, if you will, of economic success. It is a real testament to the dedication, passion and commitment of people all over west Oxfordshire who wake up one morning, have an idea, take a chance and then, without a large physical presence or large teams of international lawyers and accountants, make that idea a success. It is to help them that I rise today.
I have set out my stall, but what can the Government do? I submit that they can take a number of actions. In 2017, Amazon—I should say that other large online retailers are available—paid £7.4 million in corporation tax, despite making sales worth more than £7 billion in the UK, because tax is of course paid on profits, not on revenue. I suggest that more can clearly be done, and I know that the Government are starting to look at doing it, to reflect the true value of such companies and to ensure that our tax system is designed for the 21st century, not the 20th or the 19th.
I welcome the Treasury’s consulting on a new tax on the tech giants. We need to ensure that they pay their fair share alongside the smaller companies, and moreover that small companies are confident that the tax system is not stacked against them. I draw a distinction between types of online companies. My point is about large online companies; of course, many tech start-ups are online but are very small. I suggest that any such taxation—whether a new tax or an amendment to the existing tax system—should be reserved for the largest international businesses. What better way could there be to fund the NHS, defence or schools than by ensuring that those larger online companies pay their fair share of taxation alongside the small companies?
I am delighted that the 2017 global start-up ecosystem report from Startup Genome ranked London as the third best city in the world for tech start-ups—the only European city in the top five—behind only New York and Silicon Valley. Large cities tend to dominate the headlines, but as I hope I have illustrated, in the green lanes and rural villages of west Oxfordshire are hundreds of companies that drive our economy every day. It is those businesses that will make a real difference to all our constituents, our constituencies and the nation’s economy overall. We must not burden those start-ups with further administrative costs or further taxation. I welcome the action that the Government have taken to reduce corporation tax, but the additional revenue from any tax on big online retailers could enable us to help small businesses further with their corporation tax or to provide for further relief or exemptions for small firms—particularly those on the high street.
The Government can help with this issue, but I am very keen, in the final moments before I let others have a say, to say that there is more that we can do as well. The Government can help to level the playing field, but we must not forget that we all have a responsibility to shop local whenever we can and to support local businesses when possible. We must try to shop from them and not simply go to the large online retailers. That may make things easy, but it does not support those who are living in our towns and villages. We need small businesses—they are the engines of our local economies and they bring jobs, services and colour to our high streets. I ask the Government to bear those points in mind as they consider a way to tax the large retailers.
Lee Rowley (North East Derbyshire) (Con)
It is a pleasure to serve under your chairmanship, Dame Cheryl. I am grateful for the opportunity to speak. Like my hon. Friend the Member for Witney (Robert Courts), I congratulate my hon. Friend the Member for Harborough (Neil O’Brien) on securing this vital and incredibly timely debate on an issue that we talk about in this Chamber and beyond.
An important principle that needs to be established is that of a level playing field on taxation as a whole across commerce. If we do not ensure that people have confidence in that, legitimate questions can be and are asked about how markets work, whether they are effective and whether the Government are regulating them properly.
Before I talk about the specific issue before us, it is important to recognise the huge benefit that the development of the internet has brought over the past 20 or 30 years. It is something of a truism to say this, but we have an entirely epoch-changing set of opportunities before us because of what the internet offers us and what e-commerce hopes to drive. We have been able to make more perfect—I use that phrase advisedly—markets in terms of reduced barriers to entry. We are able to serve customers in an easier, more timely and more convenient way. We can ensure that people have the things that they want, and that we respond to the combined views of people, as demonstrated via the mechanism of the market. In the United Kingdom, 1.5 million people are employed in e-commerce businesses directly, and a vast supply chain and vast group of people support those industries indirectly. It is important to recognise and acknowledge the benefits that the internet has brought over the past 15 or 20 years—within our lifetimes—to the country as a whole and to the world in general.
However, the principle that my hon. Friend advances is absolutely right. We must have a taxation system that is fair, notwithstanding the huge benefits that have been brought to society by the internet over the past 15 or 20 years. I completely agree with the statement in the Government’s paper that failure to find the right system undermines the fairness, sustainability and public acceptability of the corporate tax system, which we need to avoid at all costs.
I therefore welcome the review of taxation and what the Government are doing to look at the matter in more detail. I acknowledge and recognise the challenge—my hon. Friend outlined that better and more comprehensively than I could ever hope to do it. The Government are right to have an open mind on many aspects. It is right that they will have an open discussion with those who are interested, and to set out that, of necessity, they are likely to look at both short and longer-term solutions.
Underneath, there is an inherent tension and problem, which is how we define user-created values. I think I accept the principle that taxation should be based on value creation as a whole, but how we define that and whether we create a system that is incredibly complicated in order to be able to tax it is something on which the debate and discussion has a long way to go. It is good to see the Government are approaching the matter in that open way.
I also think we have to get away from some of the tendencies over the past five years or so on corporate tax to shout loudly as a collective political class about corporate tax, rather than doing some of the hard spade work. That is exactly what the paper suggests and what many hon. Members are debating. It is no good shouting at companies in Select Committees when they are obeying the letter of the law, even if they are not obeying the spirit. Let us change the law so that that does not need to be done. I say that as someone who has just joined one of those Committees and will probably be shouting at people over the coming months and years as a result.
I understand why that happens, but I am similarly sceptical of gifts, benevolence and contributions to the Exchequer for no apparent reason, much as I understand the principle. That kind of approach is not one that we should perpetuate over the long term if we want to create the stable taxation system that attracts companies, promotes economic growth and supports development on all sides.
I therefore welcome the discussion. I welcome the willingness to review and to do so in such an open way. I agree with many of the points that have been made, particularly in the introduction. I would just like to broaden the subject slightly and make two additional points.
This is a symptom of a much wider challenge in capitalism, corporation tax and taxation in general. We are entering an era of internationalisation with regard to many of the challenges. That has been evident for a number of years, but has come increasingly to the fore over the past decade or so. I am thinking of the cross-border challenges that my hon. Friend outlined. What the OECD has done to date is a good start—the principles it has outlined are positive—but there appear to be limited opportunities to move that forward in the short term. We have to encourage supranational organisations to take on these knotty problems and look more closely at how they can solve them over the long term. If we do not have the institutions that can support the regulation of things such as tax, we will lose the confidence of populaces that rely on us to ensure that taxation is taken. We can debate in this Chamber how big or small that taxation should be, but we have to ensure that the framework is there in the first instance to support it.
There is a much wider conversation to be had, not just about taxation but about the approaches within the sphere of the internet, and how it has commercialised over the past 20 years or so. That is probably a debate for another time, but I hope you will allow me to spend just 30 seconds on it, Dame Cheryl.
I separate out entirely the many hundreds of thousands, or millions, of companies that use the internet to deliver services daily in a cheaper, and a more efficient and effective way. I welcome and celebrate them as an excellent example of how capitalism works, but a very small number of very large companies at the top of the tree have created what are essentially monopolies. They have essentially taken over whole swathes of industries. Some of them have created those industries, and all credit to them. Many of them have become very rich in doing so, or the people behind them have. But they have essentially annexed an individual industry. In any other area of commerce, we would call them out for what they are. They are monopolies or oligopolies. If someone has 90% of the search engine market, they are a monopoly. If they have 100% of the social media market, they are a monopoly. If they have 47% of the e-commerce market in the United Kingdom, they are a monopoly.
We can debate the definition of monopoly, but there are monopolistic companies at the top of these industries, and we have to think in the longer term about how we address that. If we do not do so, we will lose the confidence of people that we can regulate effectively. Either they have become so embedded that they are ultimately the infrastructure—they are the pipes upon which things run—and should be regulated accordingly, or we have to look at how we can stop monopolistic practices. The first duty of those of us who are pro-free market and pro-capitalist is to avoid corporatism and monopolistic practices at the top. Perhaps that is a debate for another time, but it is important for the wider point about how we tax, because of the activities of those companies. The reasons why we tax them in the first place derive from some of the things that they do—some of the practices and some of the monopolistic instincts that, for good or otherwise, have grown up over the past decade or so.
I therefore very much welcome the debate. I again thank my hon. Friend the Member for Harborough for introducing it and for giving us the opportunity. I look forward to the Government’s response in relation to the paper.
Mr Ranil Jayawardena (North East Hampshire) (Con)
It is a pleasure to serve under your chairmanship, Dame Cheryl, and to see in his place the Paymaster General, who is one of the most thoughtful Ministers in the Government and whom I look forward to hearing from later. I congratulate my hon. Friend the Member for Harborough (Neil O’Brien) on securing this important debate. I do not wish to go through content that has already been provided to hon. Members, but I do wish to approach the topic from a slightly different direction.
This is an exciting time for the United Kingdom. Whatever side of the fence people were on, we are leaving the European Union, and we need to ensure that the economy and the country are fighting fit, not only for businesses to exist for their own sake, but for the people they are there to create jobs and wealth for, and for the next generation who will live with the consequences of our decisions today.
I am very pleased that the Government have an agenda for a more global Britain. We are finding our feet in the world and want to ensure that we build bridges with more countries around the world, and become more internationalist and a great trading nation once again. In that context, it is important to consider, as my hon. Friend the Member for Havant (Alan Mak), who is not able to be in his place this afternoon, would say, the fourth industrial revolution, which is at a critical juncture in our country’s and the world’s history.
Technologies are emerging and affecting our lives in ways that former generations could not have imagined, perhaps in ways that we could not have imagined only 10 years ago. We are in a new era that builds and extends the impact of digitalisation in new and unanticipated ways. In that context, it is important that my hon. Friend the Member for Harborough secured this debate.
In 2016, digital tech employed some 1.5 million people in this country with about £6.8 billion worth of investment in the United Kingdom, which is 50% higher than any other European country, which shows that this country is leading the way. There is always more to do, but we have a good track record of success. It is important to cite that, because we must ensure that, as we develop our industrial strategies, and as the Government develop their digital taxation policies, we continue to back the innovators and drive growth. We must support those creating jobs and those who trade with the world to create lower prices for our consumers, providing greater choice for people across this country, but we must step in when people do not play by the rules.
Some Members have made the point about the delicate balance whereby we want to grow the economy and back those who do the right thing, but must ensure that it is fair. It is that sense of fairness—it is almost a gut feel—that people out in the country feel is often not delivered on. I welcome the fact that the Government are trying to tackle that but, as I said, there is always more to do. That comes in the great context of the UK economy growing. It continues to grow—it has grown 14.8% since 2010, perhaps confounding those who are pessimistic about the United Kingdom’s prospects in the years ahead. I mention that because it is important that digital taxation and the plethora of Treasury policy is pro-business and pro-people.
Corporation tax is 19%, down 9% since 2010, with a target of going further, which is a good thing, but I agree with my hon. Friend the Member for Grantham and Stamford (Nick Boles), who referenced earlier in an intervention that it is not just corporation tax that counts, and that business rates are very important to small businesses, to which we have given a significant number of exemptions. That is welcome, but there is always more to do. Why? Someone can have a big warehouse in any town or even in the countryside selling lots of very low-margin products, on which they will not make much profit.
Such businesses face challenges when they compete with small offices, or perhaps not even offices, selling high-margin products but paying low rates or no rates, and of course they compete with others further afield who have a different tax regime, with different rates or different regimes entirely. We must ensure we are internationally competitive. Just as we have reduced corporation tax so that we are leading the world, we must ensure we do the same in other taxation.
It is important that we raise taxation in a fair way. We are raising taxation because, without a strong economy delivering it to the Exchequer, we cannot fund public services. Nor can we help people to keep more of the money they earn. We have cut income tax for 31 million people, raising the personal allowance to do so. We have taken a lot of people out of tax altogether. We can afford those things in the long run only if we get taxation right, and only if we ensure that business taxes are internationally competitive. We should encourage businesses to base themselves here, and ensure that they genuinely get money into the Exchequer.
As I said earlier, we must ensure that the system is fair, because tax evasion and aggressive tax avoidance irks people. I am pleased that, since 2010, HMRC has recovered £160 billion for the Exchequer, which is good news. That money can go into public services when it did not previously. I understand we are trying to combat online VAT fraud as well. That is good progress, but there is more to do.
I note in the Government’s report that they seek to have more OECD and G20 co-operation to control those measures and tackle the issues. The report states:
“the preferred and most sustainable solution to this challenge is reform of the international corporate tax framework”.
I agree with that because there is no point in our doing one thing if other countries do not follow, and no point in our doing one thing if we cost jobs in this country and put businesses out of business. That is not in the Government’s, the country’s or the people’s interest.
Businesses employ people who need to look after themselves and their families through the security of a job. We must maintain competitiveness and ensure we deliver lower taxes for all, but we must ensure that those taxes are fair and that they are paid. I am afraid to say that that is absolutely in stark contrast to Labour party policy. Although the hon. Member for Bootle (Peter Dowd) is a good chap with whom I have had many pleasant exchanges, I have concerns that the Labour party—I wait to be confounded and corrected—does not seem interested in how to make businesses and taxes work, and instead is looking at policies concerned only with protectionism, looking at the past and taxing hard-working people more.
Luke Graham (Ochil and South Perthshire) (Con)
My hon. Friend is making a very good point about Labour and tax, but it is not just about Labour. It is important to take into account the Scottish National party. Its tax-varying powers were used to increase bands of taxation, which has led to unintended consequences. The impact on marriage allowances and pensions and things will disadvantage people in our constituencies.
Mr Jayawardena
My hon. Friend makes a strong point. It is right that we consider the implications across the whole of this country of the policies of the Labour party and the SNP-led Government. We should also look at where the Liberal Democrats and Greens wish to take our taxation system, which is wrong-headed in so many ways. The tax systems they espouse seem to look back and to tax people more. They do not seem to be interested in how to boost business. They are not interested in the future. They do not seem to care about the next generation and how we will ensure that we create a Britain fit for the future.
Several hon. Members rose—
Chris Philp (Croydon South) (Con)
Thank you, Dame Cheryl, for a carefully considered selection. I am glad I was the least worst alternative.
Dame Cheryl Gillan (in the Chair)
Order. I was expecting another hon. Member to stand to indicate that they wished to speak. They have not yet stood, so you may speak, Mr Philp.
Chris Philp
I am sorry that that more attractive alternative did not present itself. However, it is of course an enormous pleasure to serve under your chairmanship, Dame Cheryl. I add my congratulations to my hon. Friend the Member for Harborough (Neil O'Brien) on securing the debate.
I am not sure I want to confess this in public, but I will: when this document, “Corporate tax and the digital economy: position paper update”, arrived in my inbox this month, I quivered with excitement because the topic is so important. I am delighted to see the Government, and particularly the Financial Secretary to the Treasury, my right hon. Friend the Member for Central Devon (Mel Stride), who I gather has been upgraded to be the Paymaster General as well—
Chris Philp
He is a man of many talents. I was delighted to see him taking the initiative in this important area.
It is worth saying that significant progress has been made in the past eight years, as some colleagues have mentioned. The country’s tax gap is at just 6%, down from 8% in 2010, and is the lowest among OECD countries, which is a very good thing. The amount of corporation tax that we have collected has gone up from about £35 billion to about £55 billion in the past eight years, despite the fact that, as my hon. Friend the Member for North East Hampshire (Mr Jayawardena) mentioned, the rate at which it is levied has gone down. That is all extremely welcome, and the Government are to be warmly commended for that progress.
It is, however, also true—I think this view commands widespread support—that a number of typically large multinational companies, often providing digital services, such as Google and Facebook, have succeeded in organising their affairs, fully in conformity with current international tax laws, such that they manage to argue that the substance of their economic activity takes place in very low-tax jurisdictions. Those jurisdictions are often in the Caribbean, and I suspect that they are not selected for their clement climate. That situation strikes me as fundamentally unfair and unreasonable. The Government have, of course, already taken a lead in the matter, via the base erosion and profit shifting initiative, including such things as limiting the deductibility of interest expense to 30% of earnings before interest, taxes, depreciation and amortisation. The UK Government led on that, and are to be strongly congratulated on it. However, there is scope to go significantly further.
It just does not seem right or fair that a company such as Google, with revenues in relation to UK customers in the order of £4 billion, pays virtually no tax by successfully arguing that the substance of its economic activity lies elsewhere. That is why I was so excited by the position paper update, published a few weeks ago. The approach laid out in the excellent position paper, which by the way I fully support, is a multilateral one of trying on an international basis to redefine economic activity to account for the value created by users. It is exactly the right thing to do, and I hope we are successful in that. However, I suspect that as with any multilateral enterprise, it will take time to get agreement with many other countries, particularly when some of the companies concerned will use their influence to try to slow things down and stymie progress. While it is certainly right to take a multilateral approach to changing the way we define economic activity, it is important to have a plan B that could be implemented much more quickly.
The position paper deals with that admirably. It discusses a tax on sales and, as hon. Members have said, the European Union is looking at that. I fully support that approach. A threshold of the kind that we have talked about, to exclude small and even medium-sized companies, is the right thing. The number that I heard mentioned—3% of sales—seems reasonable. A point that I want to make more for the 27 European countries than for us is that care should be taken to ensure that the EU does not use it as a pretext for retaining the tax receipts and developing a European Union treasury function for the first time. That will not, I think, concern us, but it might concern the other 27 members.
I advocate that if the European Union does not move quickly enough and implement the sales tax in a timely fashion—and by “timely” I mean that I hope it would happen in the next 12 to 24 months—the UK should take unilateral action. My hon. Friend the Member for North East Hampshire made a cautionary point about not making the UK uncompetitive, but of course the tax would be based not on where the company was domiciled but on where its sales occurred and where its users were. It would not be a disincentive to locating in the United Kingdom, either for permanent establishment or locus of incorporation. A sales tax or, indeed, a user tax would not violate the principle of competitiveness to which my hon. Friend rightly referred. We are generally speaking the second largest market for the companies in question, behind the United States of America. We are significantly larger than Germany because our economy tends to be rather more intensively digital. I do not think that, if we took unilateral action, Google or Facebook would suddenly refuse to do business in the United Kingdom. If they did, they would be pulling out of their second largest global market.
I suspect that unilateral action on a sales tax while we are a member of the European Union—and, I suspect, during the transition period up to December 2020—would probably be classed as VAT, or sufficiently similar to VAT to fall foul of European regulations. If we have to consider unilateral action, which I advocate and support, prior to our exit from the EU or the end of the transition period, something other than a sales tax would have to be considered. Something we might consider that would not fall foul of EU regulation on sales taxes and VAT would be a tax based on users. We might set a user-based tax of a certain pound amount per active user, for example. That would, again, apply only to the very largest companies with, perhaps, a UK turnover in excess of £100 million. That would make sure that they made a reasonable contribution before we managed to come up with a multilateral solution at global level or a sales tax at European level. It would, I think, be a good move. It would not undermine our competitiveness and it would mean that those companies were seen to make a fair contribution.
The proceeds of such a tax could usefully be applied in the area of business rates. Several colleagues have mentioned that, and I am sure that small businesses in all our constituencies have raised the issue of business rates with us. Of course, digital companies such as Google and Facebook—and even Amazon, because it operates from large warehouses in remote locations that do not have a high rateable value—pay little in business rates. They also pay little in corporation tax, although of course they pay their full share of payroll taxes. It is inherently rather unfair: local high street businesses pay their full share of business rates and corporation taxes. So some of the money raised by the digital tax, whatever form it might take, could be applied to offer business rate relief, particularly to smaller businesses—perhaps those with less than £28,000 a year of rateable value.
I should be interested to hear the Financial Secretary’s response to the one or two ideas that I have set out. Really, however, I want to express my strong and enthusiastic support for the course that he has laid out. It is a great pleasure to come here and support it.
Mrs Kemi Badenoch (Saffron Walden) (Con)
What a pleasure it is to serve under your chairmanship, Dame Cheryl.
When I heard that there was to be a debate on digital taxation I was really excited, because digital and tax are two of my favourite subjects. I am sure that hon. Members know that I classify myself as a low-tax Tory, but not many people will know that my career to date has been in digital. I congratulate my hon. Friend the Member for Harborough (Neil O'Brien) on securing the debate and wholeheartedly support his comments and suggestions. I shall focus on user-generated content, an important matter that he spoke about.
Many hon. Members have spoken today about property taxes, business rates and the losses that smaller companies have had to endure in competing with large digital companies. Inevitably, the wider discussion when we talk about large tech companies is about tax avoidance and tax evasion. Tax has various purposes, and one is to deal with the negative side-effects of those activities. The Financial Secretary will be familiar with Pigouvian taxes, which are designed specifically to tackle those negative externalities. That is what I propose today.
The main externality for my constituency is to do with crime and policing. Cyber-crime has grown exponentially, and user-generated content is a significant part of that. There are crimes we never saw previously—the creation, sharing and distribution of indecent images, especially of children; harassment on social media; cyber-bullying and other activities designed to cause distress and anxiety; and, of course, online activities related to terrorism, hate crime and all sorts of incitement. All those activities take place on large digital platforms, but it is claimed that the content is not theirs but belongs to the user. How are we going to deal with that? This issue has taken up a significant proportion of the time and priorities of Essex police. The police and crime commissioner and the chief constable have reiterated that dealing with cyber-crime is their No. 1 priority, and a lot of police time is redirected to that area. Who has suffered? The people with whom many of these large digital businesses are competing.
Local businesses in my high street have suffered an unprecedented spate of burglaries. I will not get into arguments about cuts in police numbers or whatever, because I do not think it is about that. This is about the police having to do so much more than they ever did before. Many of the crimes that I have listed did not exist 20 or 30 years ago. This is not just a matter for the Home Office; it is one for the Treasury.
The principle of a Pigouvian tax is a financial matter and has been established in many other areas. For example, the British Transport police are funded by subscriptions paid for by train companies, and local businesses in certain towns invest in business improvement districts that fund police officers. Pubs and clubs have to pay licence fees that contribute to the policing of the negative externalities that come from their activities. Recently, I have seen beauty parlours have to get a licence because they have been used as a cover for money laundering and other illegal working. We should consider taxing this new area. I do not like to propose new taxes, but the cost of these activities is being borne by citizens and businesses across the country, and it is those who make the most money from them who should be paying.
A double dividend comes from these sorts of taxes—we can see the cost of the crimes and direct money to the areas most affected. It is not good enough for companies to say that the issue has nothing to do with them, or not to appreciate the social cost of their activities. My remarks have been brief, but my question to the Minister is this: given the many externalities from online businesses, and particularly from user-generated content, should the large digital companies that create and run those platforms pay a significant amount of the cost?
Stewart Hosie (Dundee East) (SNP)
It is a pleasure to serve under your chairmanship, Dame Cheryl, and I congratulate the hon. Member for Harborough (Neil O'Brien) on securing this genuinely important debate. I agree with much of what he said at the start of his contribution, particularly about tax base erosion. That is why I welcome what the Government have said previously about the focus being on economic activity rather than simply profit. We must begin to tackle the rather vexed and long-standing issue of profit shifting.
However, I am not sure whether the hon. Gentleman’s interim solution would work. In essence it would be a turnover tax, and although there might be some superficial merit in that, it could potentially be damaging for high-volume, low-margin businesses. It would also, I suspect, immediately increase the risk viewed by those who provide capital for large digital start-ups—perhaps those with a large turnover and a business plan that will not see profit for some time. One can see how the funders of capital for such start-ups might be tempted to put their money into similar businesses located elsewhere.
Chris Philp
Google and Facebook can be described as many things, but “low-margin” is not one of them. I suggested a threshold of £100 million for UK sales or €750 million for EU-wide sales—such businesses are certainly not the start-ups referred to by the hon. Gentleman.
Stewart Hosie
Indeed they are not, but I was referring specifically to an increased risk for start-ups that perhaps have a similar model. That is important if we are to tackle the monopoly argument that was raised earlier.
This debate is not only about taxing digital companies; it is also about the UK Government policy of making tax digital. The SNP fully supports the principles behind that and the move to a phased introduction of digital reporting, not least because we called for it previously. However, we have concerns about the implications that digital reporting might have for small businesses with limited connectivity or in rural areas. We are also concerned about the closure of HMRC offices in Scotland and the rest of the UK, because that will limit the Revenue’s ability to provide the help and guidance that small businesses and individuals need.
Let me briefly take those three issues in turn. Following the consultation, on 13 July the Minister outlined the new timetable, which we welcomed, and said that only businesses with a turnover above the VAT threshold would have to keep digital records, and only for VAT purposes. That will happen in 2019, and businesses will not be asked to keep digital records or to update the Revenue quarterly for other taxes until at least 2020. We welcome those measures, but they will still require businesses to face challenges. Those challenges include changes to record keeping, because businesses will no longer be able to rely solely on manual records. There will also be changes to VAT returns, which must be submitted through the functional compatible software and not the normal HMRC portal, and all that is supposed to take place at around the same time as the UK leaves the EU. We all know that in a period of flux when there are changes to systems, there is more opportunity for fraud. What action will be taken so that we are observant and ensure that people do not try to fiddle the system at a time of a number of simultaneous changes, which include leaving the EU and the introduction of the online digital report?
As I said, the SNP is concerned about the effect that digital reporting could have on small businesses with limited connectivity or in rural areas. In particular, we are concerned about the impact on small businesses with limited technology for connectivity—or those that do not make much use of the internet—if they have to report online. Such measures will also affect smallish businesses in rural areas, where connectivity may not be as good as is required. I know there is a fall-back position, which I welcome, but will the Minister confirm that if digital capacity is not there, the fall-back position will be the current manual system, and that we will not create a new manual system to replicate the online system as it goes live?
The closure of HMRC offices could limit the Revenue’s ability to help businesses and individuals. That is important because as we know, a large part of the tax gap is due to error by both those paying and the Revenue. With the introduction of a new system, combined with the closure of local tax offices, may we have an assurance that there will be a good degree of forbearance for anything identified as an honest mistake during that period? I am also aware, as other hon. Members will be, of how specific local knowledge has uncovered fraudulent activity that would have gone undiscovered in a more general, generic system. Will the Minister confirm what checks and balances will be introduced with the new digital reporting, particularly on VAT, to ensure that some of the rather more obvious scams that we all know and have seen are detected, and the fraudsters punished?
My final point is slightly tangential, but it is important: we must not let technology drive the policy. If the digital tax roll-out is a huge success, one can see the temptation for the Government to say that we should lower the VAT threshold—after all, it is only a change to a number in the computer system. However, if the VAT threshold is lowered—it was rumoured that that would happen at the last Budget—businesses that turn over £60,000, £70,000 or £80,000, and make a good living for someone, or even two livings, will suddenly have to take 20% off their bottom line because their raw costs are low and they can claim little back. If the digital tax roll-out works, the Minister must not allow that to drive the policy and drive down the VAT threshold. I believe that would be a mistake, because it would crush entrepreneurialism and start-ups if people thought that with that additional VAT burden, it would be a struggle to make even one living out of a business that turns over £60,000 or £70,000.
Peter Dowd (Bootle) (Lab)
It is a pleasure to serve under your chairmanship, Dame Cheryl. I thank the hon. Member for Harborough (Neil O’Brien) for securing this debate on this important topic. I am in agreement with much of what has been said: I am not sure whether I should be worried about that or the other side of the Chamber should be. As for the hon. Member for Witney (Robert Courts), I am more than happy to get the shadow Chancellor to sign his red book, if he thinks that will be of help. I think I will give the hon. Member for North East Hampshire (Mr Jayawardena) a copy of “Funding Britain’s future”, and he will be as excited and quivering as the hon. Member for Croydon South (Chris Philp) as he reads it.
In today’s tax system there is clearly one rule for workers, small businesses and the self-employed and another rule for large multinational corporations, which have successfully harnessed globalisation to maximise profits while minimising the tax they are required to pay. People have indicated that today. According to HMRC, multinationals avoided as much as £5.8 billion last year in corporation tax alone. That represents a 50% increase from the Government’s previous forecast.
The growing discrepancy, as hon. Members have alluded to, between the revenues that companies such as Google and Amazon record and the low level of tax they pay in the UK only demonstrates how divorced from the reality of the modern economy our corporate tax system has become. Small businesses, on the other hand, will be subjected by April 2019 to increasing regulations and stricter timetables for the filing of online taxation, notwithstanding some of the amelioration of that process. The Opposition have raised that issue many times. The mandated start time for small businesses to file online for returns will coincide closely with Brexit, so there is a serious risk that they will be overwhelmed with the nature and scale of changes required during that period, especially in relation to digitalising tax returns.
I congratulate the Minister on his Paymaster General position. That reminds me, when the cheques are signed in Her Majesty’s presence and it is not the Minister, I am not sure who does not trust whom in that situation. Despite the Minister’s promises over the past year, I am not quite sure that enough has been done to trial the software and that should be looked at. There is a consensus across the Chamber about large multinational technological companies not paying their fair share of tax, and increasingly shifting profits offshore to tax havens and countries with low-tax regimes. We have heard, for example, that eBay paid £1.6 million on £1.3 billion worth of revenue raised in the UK. It goes on and on. Credit to those hon. Members who have raised this.
There is also the question of HMRC resourcing—raised by the hon. Member for Dundee East (Stewart Hosie)—which is an elephant in the room as far as I and other hon. Members are concerned. The Government launched two consultations last year on corporation tax and the digital economy, and royalties on withholding tax. Those are important steps, but they remain pretty poor compensation when considering the deficit of meaningful action that is being taken. The EU, on the other hand, is already considering, as hon. Members have indicated, the introduction of 3% tax on the revenues of multinational digital businesses. That tax would affect firms such as Facebook and Google with a global annual revenue—as the hon. Member for Croydon South has said—of above €750 million and taxable EU revenue above €50 million. So the policy reflects a growing shift across the world, where many countries are moving towards a tax system where companies would be expected to pay a tax on revenues rather than profits. For example, there is currently a Bill going through the Indian Parliament that would force companies to pay tax on their economic presence. Those are all options for discussion and debate. I am pleased that the hon. Member for Harborough has brought this debate to us today, because we can start the particular process of teasing out those options. That was a problem first raised at the global level by the OECD in 2012 via its base erosion and profit shifting initiative, which has also been mentioned today.
In the press, the Financial Secretary to the Treasury said that a tax on the revenues of tech companies in the UK is the “preferred option”. It might come out in the Government’s review. It will be interesting to know how the Financial Secretary came to that decision. Perhaps he can tell us more about that today. The Chartered Institute of Taxation has rightly pointed out that any action must be in co-operation with other states, as far as possible, to prevent the UK becoming an outlier. It argues that unilaterally abandoning a negotiated international approach to allocating taxable profits between countries would risk retaliation, double taxation and perversely new arbitrage opportunities.
Chris Philp
The hon. Gentleman is right to point out that in terms of profit allocation that does need to be done multilaterally on a global basis, but does he accept that a sales tax—or certainly a user tax—could be done unilaterally?
Peter Dowd
I think the debate is to be had. That is the point. In the spirit of co-operation the debate has been started today and I have tried to put in my tuppence worth, as have other hon. Members. With that in mind, I ask the Minister what discussions the Chancellor has had with EU counterparts about an EU-wide initiative to tax tech companies’ revenues. How will the EU’s initiative complement the Government’s plans? What is the likelihood of the EU’s tech tax being introduced before we leave the EU on 29 March 2019? Will the UK adopt the EU’s tax on tech companies’ revenues irrespective of us leaving?
Finally, what discussions has Her Majesty’s Treasury had with representatives from other countries outside the EU on a tax revenue for tax companies, particularly at last week’s G20 meeting? It is extremely important that the UK acts as part of a collective effort to stand up to tax avoidance and to ensure that tech companies and other multinational corporations pay their fair share and cannot operate outside the law. I exhort the Government to test out some of the suggestions made today. I look forward to hearing the Minister’s response.
The Financial Secretary to the Treasury (Mel Stride)
It is a pleasure to serve under your chairmanship, Dame Cheryl. It was a pleasure to hear the opening speech, because it was insightful, clear and well-structured and set out. Given that this is a highly technical subject, that was quite an achievement. It was also extremely thoughtful. It has been remarked by a number of hon. Members that there are quite a few of us on this side of the House. That is because we care deeply about issues such as tax. Traditionally, we like to see taxes as low as possible, as my hon. Friend the Member for Saffron Walden (Mrs Badenoch) rightly pointed out, but we also recognise that tax is important, because it provides the finances for vital public services—our national health service, our social care, our armed forces, our police, our teachers and so on. We also recognise, as several hon. Members have pointed out, that it is important in terms of fairness and of having a level playing field—particularly, in that context, for those hard-working small businesses that occupy our high streets, which have to pay their business rates, a tax which cannot be avoided whether a business is profitable or unprofitable. On this side of the House, we recognise the paramount importance of getting to grips with the issues we have been discussing today.
Hon. Members have, understandably, raised the issues of avoidance, evasion and non-compliance. Conservative Members have dealt at length on the great success we have had in that respect. We have raised or protected £175 billion since 2010. We have one of the lowest tax gaps in the world—the difference between what we could collect and actually do collect—at 6%. HMRC is doing a great job, by and large, in ensuring that those who are due to pay tax do indeed pay it.
It is important to point out, as several hon. Members have, that what we are discussing today is predominantly not about avoidance and evasion. That is an important distinction. Whatever we may feel about tech companies or internet-based businesses—and they do not always acquit themselves admirably—the accusation is not in any way that they are avoiding taxation, but simply that the current international tax regime does not effectively accommodate the way they generate value within the United Kingdom.
If this is not about avoidance, what exactly is it all about? It is about the way the current international tax regime assesses taxation and where corporation tax should fall due based on where the economic activity occurs. As my hon. Friend the Member for Harborough (Neil O’Brien) rightly pointed out, typically we would be looking at the factories, the employment of people, where the intellectual property lies and where the decisions around risk and investment in the business are taken. We know that for certain types of digital platform—typically, the search engines, the online marketplaces and the social media providers—a lot of the value is generated via the interaction between the end user and the platform itself. Therein rests the actual value. The question we then have to ask is how do we effectively address that situation and ensure that where businesses generate huge sums of profit within the United Kingdom, a fair share of corporation tax falls due to them.
We have already brought in a measure, announced in the autumn Budget, to tax the royalties that flow to intellectual property held in zero and low-tax jurisdictions. This is very much a front-foot approach to those digital-based businesses that are shifting profits out of the United Kingdom in tax terms. We are consulting on that and legislation will come forward in due course. We expect it to raise around £800 million by 2023. That is a significant sum. It is the kind of amount that could potentially be useful to ease the pressure on our high streets, as many have called for this afternoon.
The position paper last year and the March paper we just introduced by way of consultation were mentioned. In those papers, we have suggested that our preferred route is a globally negotiated deal with our partners in not just the European Union but the wider OECD. That is to ensure that any agreement works effectively, and that we avoid the problems associated with unilateral action, such as situations of double taxation between ourselves and countries that we trade with around the globe. However, in that paper we do set out an interim position.
I should make clear the Government’s intention that if we do not move forward at sufficient pace to put the appropriate measures in place, we will seriously consider an interim position—a unilateral move, which my hon. Friend the Member for Croydon South (Chris Philp) was keen to see. Under those circumstances, we would potentially look at a tax based on revenue, recognising that we do not want to capture market entrants or early-stage companies that may have some level of revenues and therefore fall to this type of tax, but which could be unprofitable at that stage of their development. This is where the whole issue of de minimis and thresholds comes in, which hon. Members have spoken about this afternoon.
In that context, it might be worth briefly referring to the proposals put forward by the European Union in its recent paper. As my hon. Friend the Member for Harborough pointed out, it has suggested that a 3% tax on revenues would be appropriate, raising about €5 billion, but that there should be a de minimis on the basis of those companies’ worldwide turnover and the level of taxable revenues that would fall due within the European Union. It also makes the point that it is important, within EU domestic tax legislation and the treaties between member states, that we have a definition of the concept of significant economic presence, which captures this idea of creating value in the way that I described. It also recognised the importance of going further and factoring in those definitions within the bilateral or multilateral trade agreements and tax treaties that we have with the rest of the world—with non-EU member states. That is to capture the fact that it is often companies outside of the EU that are transacting in this manner—many of those businesses are in the United States.
I will conclude by saying that we are very serious about this matter. I have a great deal of time and some affection for the shadow Minister, the hon. Member for Bootle (Peter Dowd), despite the red book that beats in his breast pocket as I address him. In response to him I have to say that it is this party, the Conservative party in government, that is doing something about this issue. It is not the Labour party that ever got on top of avoidance, evasion and non-compliance—just look at the 6% compared with the 8%-plus under Labour. We are the party that is bearing down on these issues.
My hon. Friend the Member for Harborough, who will wrap up the debate in a moment, has my personal assurance that we will continue to take this matter extremely seriously. We will press ahead with vigour on the basis that, ultimately, it is only fair to do so.
Neil O’Brien
It has been a pleasure to serve under your chairmanship, Dame Cheryl. It has been a huge pleasure to see so many right hon. and hon. Members and Friends taking part in this debate and we have heard some brilliant contributions.
My hon. Friend the Member for Southport (Damien Moore) made a series of good points about Making Tax Digital and the huge £400 million benefit of reduced administrative costs that we might see from it. My hon. Friend the Member for Witney (Robert Courts) represents Woodstock. Although it was not in his constituency, it is sometimes said of the Woodstock festival that, “If you can remember it, you weren’t there.” Clearly the same is true of the West Oxfordshire business awards. He made the good point that we must all shop local.
My hon. Friend the Member for North East Derbyshire (Lee Rowley) made a brilliant speech and talked about the potentially monopolistic nature of some of these firms. That was a further rationale, which I did not pick up in my speech, for having a tax that is targeted on the very largest firms. My hon. Friend the Member for Saffron Walden (Mrs Badenoch) added another rationale for such a new tax—to pay for the externalities caused by this. People running trains pay for the police on the trains. People in business improvement districts pay for extra policing. It is right that some people pay for the costs created by the growth of the online economy.
My hon. Friend the Member for North East Hampshire (Mr Jayawardena) made the point about Britain’s incredibly strong tech start-up scene compared with those of other countries, and the need to protect it. My hon. Friend the Member for Croydon South (Chris Philp) made the really interesting point that we might be less concerned about the development of the EU’s tax in this area because we are leaving. It might unite leavers and remainers to think that this is an instance in which we might be leaving, but becoming good neighbours.
The hon. Member for Dundee East (Stewart Hosie) raised some important questions and concerns about such a tax, including answerable questions about carving out start-ups and lower margin businesses, which my right hon. Friend the Minister answered well. The hon. Gentleman is right that a turnover tax is quite an unusual thing to be doing. However, because it is the only way to solve the problem, it is right to explore it.
The hon. Member for Bootle (Peter Dowd) said that we might all wonder who is more worried about the growing consensus. All I can say is that I look forward to being in the same Division Lobby as him later in the year perhaps. I thank the Minister for his kind words and reassurance that the Government plan to press ahead carefully but decisively to ensure we have what we all want on this side of the House—a low-tax system that is also a fair tax system.
Question put and agreed to.
Resolved,
That this House has considered digital taxation.