Hammond’s Budget targets digital tax reforms, as UK growth forecasts fall once again

This week’s Autumn Budget – at a first glance – might seem a little bland for business. But the ingredients are there to leave a sharp, or even sour, taste for some, write Tim Law, James English, and Saagar Dattani.

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Chancellor Philip Hammond took centre stage once again on Wednesday – as he delivered the Government’s spending outline for the next 12 months.

In the context of a downgrade in the UK’s economic growth, Hammond pledged funding for the NHS, cash for regional developments across the country and put money aside to try and kick-start the UK’s failing welfare ‘Universal Credit’ system, too.

He also targeted first time house buyers. Stamp duty will be abolished on houses worth up to £300,000, with savings too for those buying a property valued between £300,000 and £500,000. Reaction to this has been mixed. On Wednesday, the Office for Budget Responsibility suggested that this move will actually increase housing demand pressures – which in turn, would increase house prices, and minimise any potential savings made through the abolition of the tax.

And – somewhat inevitably – Brexit loomed large too. Hammond bowed to the Brexiteers, offering an extra £3 billion to help the UK manage, and plan for, Brexit.

Some predicted that, in this current economic climate and with funding decisions increasingly under scrutiny, Phillip Hammond might have had to take on big businesses to raise some additional revenue. Talks of increasing corporation tax, and an array of taxes to squeeze money from the City, are on the radar of the current Labour Party. But for the Conservative’s, such pursuits, and these kind of tax hikes, are often regarded as an ideological non-starter. Hammond was no exception to the rule.

The Chancellor committed to continue with already announced decreases in the corporate tax rate – which remains on course to reach 17% by the end of 2020, still the lowest in comparison to other G7 countries. He tested the water a little, by stopping the ‘Indexation Allowance’ of capital gains for businesses. In effect, this takes away the inflationary uplift in cost businesses are currently allowed to apply, so in future they are taxed on the full gain. According to forecasts, this initiative could generate over £1.7 billion in extra corporate tax over the next six years. A nice boost for government – but some have called this a stealth tax on businesses.

Digital taxation abuse also featured. Hammond pledged – in the words of the BBC – to ensure that ‘digital economy royalties related to UK sales which are paid to a low-tax jurisdiction’ will be subject to income tax. In short, this means international digital businesses, with a corporate structure that involves paying royalties out of the UK may be required to pay income tax on those royalties.

It’s a big move, even if the numbers aren’t that huge. It’s only forecast to raise £200 million on average over the first four years, and the amount decreases year on year. But in Hammond’s words it sends a ‘signal of determination’.

In our view, it sets a hefty precedent.

It signals a unilateral approach to taxation from the UK. A bold step forward on the issue when most of the world is looking to the OECD to drive the international tax direction and the EU – which has long scrutinised the issue – is less and less concerned about the fate and fortunes of the UK, and more concerned with setting an agenda for the soon to be EU-27.

It’s also further evidence that the UK is, at least trying, to take a firm stance on tax avoidance. A ‘position paper’ has been published on the issue, and an open consultation is underway. Businesses need to be in a position to understand the changes being proposed here in the UK – which, owing to the UK’s unilateral instinct, could, over time, diverge significantly from what the OECD and EU come up with in the future.

It’s also a warning for big business – and particularly technology companies – who are increasingly operating in the digital space. Hammond spoke at length during his speech about the need for the UK to embrace technological, and digital, change. But there are limits to this and this tax proposal, potentially, is evidence of the need to play by the rules. At the very least, in the short term, we can expect a heightened focus on the tax affairs of digital companies with a presence in the UK amidst the ongoing consultation.

All in all, a tough Budget for a Chancellor who was – and remains – under considerable political pressure from within his own Party, and the Opposition, to satisfy an array of competing interests on public spending, Brexit and Government reform.

Feeling squeezed himself, Hammond did not seek to introduce radical change to the operating environment of UK businesses. Except perhaps when it comes to digital taxation abuse – where the Treasury are very much setting their own agenda, and asking others to fall in line or face the consequences in the future.