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With this it will be convenient to discuss new clause 11—Digital Services Tax: review of effect on tax revenues—
(1) The Chancellor of the Exchequer must make an assessment of the net effect on tax revenues of the introduction of the Digital Services Tax and lay a report of that assessment before the House of Commons within six months of the passing of this Act.
(2) This review must also include an assessment of the revenue effect of the Digital Services Tax on tax payable by the owners and employees of Scottish Limited Partnerships.
This new clause would require a Government assessment of the effect on tax revenues of the DST, and in particular the change in revenues associated with Scottish Limited Partnerships.
Clause 70 would require the Treasury to conduct a review of the digital services tax before the end of 2025. Our amendment 7 would require a report to be provided annually. It has become clear from our debates in Committee today that the tax poses a number of different challenges to businesses and Government alike. That is why we have tabled an amendment that calls for a yearly report on the tax.
Earlier in our discussions, I highlighted that there is a substantial gap between the revenues of multinational digital companies and their tax liabilities, and that they are ultimately estimated to be underpaying on what is required. Even the Government’s modest predictions of what the tax will generate are in question. I appreciate that, as we discussed earlier and this morning, it can be difficult to arrive at such estimates with any degree of certainty. That said, the figures for the amounts that the Government intend the digital services tax to generate are quite modest.
I refer again to the OBR’s assessment of the Government’s costings methodology in 2018. It said:
“Every stage of this costing is uncertain. We have assigned uncertainty around data as ‘high’, uncertainty around behaviour as ‘medium-high’ and, given the complex multi-stage costing methodology, uncertainty around modelling as ‘very high’.”
Part of that is due, the OBR states, to behavioural responses, which could include
“reclassifying revenue currently in scope as being out of scope, particularly for groups with mixed business models; altering business models to generate new revenue streams that are out of scope; and profit shifting. The costing allows for attrition rising to 30 per cent by 2023-24.”
It is clear that the already limited takings of this tax could be reduced further by the practices of digital companies to reduce their liabilities. Yearly reporting would confirm whether such concerns are justified and would highlight what more the Government need to do to ensure that such companies pay a fair and appropriate amount of tax. A detailed yearly report would also help us to understand the distributional impact of this tax—whether, as the Chartered Institute of Taxation notes, it under-taxes businesses with high profit margins and over-taxes those with low profit margins.
The merits for regular reporting are also made clear in the Government’s response to their consultation in July of last year. They noted that respondents to the consultation believed that thresholds for the tax should be reviewed and potentially increased over time, given that the digital sector is characterised by rapid growth. Again, as we heard from Government Members, the pace of change in technology requires us to be fleet of foot in our response. Does the Minister not agree that the arguments put forward in his own Government’s consultation make the case for more regular reporting, and even a review of these measures?
Despite the strong justification for regular and transparent reporting, the Government have committed only to a review by 2025. We find it strange that they are unwilling to consider a more regular review of what is, to put it quite lightly, a contentious tax, even if one accepts the principles underlying it, as Opposition Members do.
As I have said throughout the debate, the times we are living through demand much more ambitious action. It is imperative that those with the broadest shoulders—including the digital giants, who are doing pretty well out of this crisis—bear a responsible amount of the burden. I am sure that the Minister would acknowledge that that reflects public sentiment on this issue, which has shifted over time; that is why the Government felt capable and confident about bringing forward this tax in the first place.
Perhaps the Government’s unwillingness to report regularly on the tax is a case of managing expectations, as highlighted by the Chartered Institute of Taxation, which says that the measure is not
“aimed at stopping profits arising in the UK being shifted by multinationals out of the UK to tax havens”,
“it is unlikely to raise amounts that materially affect the country’s finances, particularly in the context of the amounts being spent on COVID-19 measures.”
Therein lies the importance of yearly reporting, so that we can see how much these companies pay in tax, and whether more needs to be done.
That brings us to some wider issues around tax transparency and the Government’s approach to supporting companies during this crisis. We appreciate that the Government had to respond with real speed in making sure that people stayed in work and that our companies remained afloat in order to emerge from this period. However, at the same time, there can be no excuse for the level of tax avoidance in the UK in recent years. The vast majority of businesses do the right thing, including the many on our high streets that are so well respected and are very much regarded as part of the community, providing a much broader service to the public. I think there will be a growing public expectation that businesses should see that there is fairness within the system.
That is why we have also been urging the Government, in the measures brought forward both here and more broadly, to consider issues around fair tax practices, environmental standards and preventing share buy-backs where pandemic-specific Government and public support is offered to particular industries. One need only look at the action taken by the Labour Government in Wales to understand that it is possible for the Government to bring forward additional measures to safeguard public money, so that we do not see abuse in this area and that we see fair and just tax practices.
We discussed international co-operation and the need for a multilateral response. The Minister will be aware that my hon. Friend Dan Carden, who is also a member of our Front-Bench team, has raised with him in parliamentary questions some issues around building support at an international level for comprehensive and effective reform of the taxation of multinationals, instead of advocating partial patch-up measures targeting only the very large, highly digitalised companies, while continuing to adopt unilateral measures such as the diverted profits tax.
The issue around tax transparency specifically is that the UK will not allow the OECD to publish aggregate country-by-country data. I am aware that the Minister said in response to my hon. Friend that that was because of technical deficiencies within the system. I would be grateful if he said more about that. We all want to understand any efforts being made by some of these multinationals to avoid paying their fair share, and we all want to make sure, at this time of national crisis, that our public services can rely on the funding they need to get through this time.
If the takings of the tax turn out to be as limited as some might fear, it would of course further the argument that we need to implement more wholesale and ambitious measures to tax multinational digital enterprises. That is the approach that the Opposition will continue to call for.
I also want to highlight a concern raised by many stakeholders, including the Chartered Institute of Taxation, that there is no sunset clause in the legislation. Does the lack of such a clause suggest that the Government are willing to maintain this measure indefinitely, despite its imperfections; or will they continue to keep it under review? If the latter is the case, it strengthens the argument for annual reporting.
Finally, the new clause tabled by the SNP appears constructive. In many ways, it is similar to our amendment on assessing the effect of the tax, although perhaps within a timeframe within which its impact will not have been fully felt. Although we are sympathetic to the proposal, I should be grateful to hear a bit more about the aspect of the new clause that relates to Scottish limited partnerships.
Clause 70 requires the Government to review the DST and submit such a review to Parliament in 2025. It is a Government priority to secure an appropriate global solution to the corporate tax challenges posed by the digital economy, as we have discussed. As we have also said, once such a solution is in place, the DST will be removed.
Should the DST remain in place in 2025, the review will consider whether it continues to meet its objectives and whether international reform means that it is no longer required. However, it remains our strong preference to agree and implement an appropriate global solution, and to remove the DST as soon as possible.
The hon. Lady raised a point about the absence of a sunset clause. The 2025 review allows a context in which the Government can have an in-the-round consideration of whether this tax—were it, unexpectedly, still on the statute book—was doing its job and if it is, how it could be improved, and if it is not, where it could be tweaked to further advantage.
The amendment would require the Government to produce a review of DST annually rather than in 2025. It is not clear what the hon. Lady means by a review, but there are already very substantial processes in place. HMRC regularly reports on the taxes that it is responsible for collecting and DST will be no exception to that. It will be possible for parliamentarians and the public to scrutinise what tax has been collected by this measure. It is a new tax, so there may be some variety or it may come in higher or lower than expectation.
A review in 2025 as a backstop ensures that, should the DST remain in place at that point, its continuing relevance can be considered against the relevant circumstances at the time. However, the Government keep tax policy under continuous review through the annual budget process and, as I have said, it is our strong preference to agree and implement an appropriate global solution.
A review in the formal sense is a substantial undertaking. It is something that is done periodically to assess the viability or effectiveness of taxes. Given the amount of scrutiny that exists on existing tax, and given the fact that this is a new tax, that scrutiny will be carefully exercised. No doubt it will be scrutinised in Parliament as well, through the usual channels.
The case for a review comes when there has been a period of time in which one can establish and look at the track record and effectiveness of the tax. As I have said, however, we do not expect it to be on the statute book, because processes are under way internationally through the OECD that we expect to bring about a global solution that will be satisfactory to us and to the other countries involved.
I am trying to understand what the Government’s understanding of temporary is. How long is temporary—five years? The Minister has said that it is a temporary measure. I understand what he is saying about a review being a substantial undertaking, but if the measure is meant to be temporary, do the Government have set guidelines about what they think temporary is?
It is not often that I am invited to engage in philosophical speculation on the nature of time. Temporary, as far as I am aware, does not have a definition in law. We are framing the measure in the context of currently existing practices and discussions within the OECD. We expect those to come to fruition in the next five years.
As a long stop date, we have left a review in 2025 in place, but of course the Treasury may decide to vary that, or indeed the Government may decide to take it off the statute book, if such a process is forthcoming. The hon. Lady will be aware that taxes have a tendency to mutate. When the income tax was introduced by William Pitt, it was allegedly temporary, but it was temporary only for a while and then came back. It is a good point, however.
I will turn to a couple of wider points mentioned by the hon. Member for Houghton and Sunderland South. She talked about tax avoidance, and she will be aware that, as I have touched on, the Government have done a great deal to tackle and address tax avoidance; there are several such measures in the Bill, which I thank the Opposition Front-Bench team for supporting. Indeed, it is worth noting that the tax gap has continued to fall, which reflects the excellent work of successive Administrations. That is over and above the passage of a variety of measures designed to cut down on tax avoidance and evasion and, of course, an anti-promoters strategy, which is currently the subject of consultation with the public and which we hope to bring to fruition later this year. A series of initiatives is already under way, in addition to much previous work in that area.
On the issue of country-by-country reporting, the hon. Lady will be aware that we already, with the strong encouragement and support of the Government and our predecessors, have private country-by-country reporting, which was an important move forward. The difficulty is that public country-by-country reporting requires a measure of international consensus. If it does not have that, it runs the risk of setting all kinds of incentives that might actually have the effect of undermining the policy and the transparency that we move to, so it is an evolving position in this country, as in the OECD. We hope that the general move towards more integrated global solutions and greater transparency is one that we can reach in all those areas.
Thank you, Ms McDonagh, and I thank the Minister for allowing me the opportunity to speak to new clause 11, of which there are two parts. The first relates directly to the digital services tax and the second relates to Scottish limited partnerships in relation to the DST. I shall come to that in due course, to address, I hope, the concerns of the hon. Member for Houghton and Sunderland South.
With direct reference to the new clause and DST, the Minister has taken great pains to stress that this is a new tax, and because of that we need to take things slowly. However, I feel there will still be a strong element of cynicism in the public domain about how effective the tax will be, which his why we have tabled new clause 11. Such cynicism would certainly be justified. Earlier we heard about Amazon as an example of a large multinational corporation that benefited from the lack of direct taxation. For instance, last year I believe it paid £220 million in direct taxation in the United Kingdom, despite revenues in excess of about £11 billion. That is neither sustainable nor fair.
As to fairness, we heard at great length earlier about online retail’s impact on high streets across the United Kingdom. We need not go far to see that many shop fronts are now derelict because of the change in consumer habits. I suggest that those habits are unlikely to change, particularly for people in the younger generations who have become accustomed to sitting in the comfort of their home ordering what they want, and getting it delivered in a day or two.
That being the case, we need to create an element of fairness, which will allow revenue to be gained and income put back into the system. I imagine Members can think of many avenues for spending that revenue, but perhaps it could be spent to provide local authorities with the finance they require to invest in city centres and transform them into something better. The issues relating to DST have perhaps never been as relevant as they are now, given the prevalence of online retailing.
We also need to be mindful during the pandemic of the fact that many companies in Scotland and the United Kingdom face an extremely bleak future, and will still have to pay their fair share, as they have always done. It is unacceptable for us to be in such a situation. That is why I welcome the measure, although it could perhaps have been dealt with in a way that sought to bring in more revenue. Many companies will be in extremely challenging circumstances, through no fault of their own, and we must have a system that provides fairness, as they would expect.
Netflix was discussed earlier. I understand, as do Members on both sides of the Committee, that it might not have the same financial burden of payment as Amazon. I did not ever think I would use this phrase in the Houses of Parliament, but rather than “Netflix and chill” the expression should surely be “Netflix pay your bill.” The reality is that it has coined it and has not had to pay back. No fair-minded person can support that.
I appreciate the Minister’s comments and understand his position: we need to see where the OECD is coming from in its approach. Ultimately we need a global, sustainable position on online taxation; everyone recognises that, but the Government have been slow in getting to the point where they are now, and they could have gone further. The new clause allows them to reflect on where they will be. As I have said, public cynicism will continue to be rife.
That brings me to the second element of the new clause, which relates to Scottish limited partnerships. As all those present are aware, the future of SLPs has been contentious. My colleagues in the Scottish National party have on numerous occasions suggested to the UK Government that changes need to be made, and that SLPs need to be brought under control. After all, they are not taxable in the UK if none of their members is resident there. There is a concern—a justifiable concern—that SLPs may be used to avoid DST. That is the crux of where we are coming from and it is an extremely reasonable concern, given the propensity of SLPs to be used for tax evasion in the past.
I do not wish to suggest that Amazon or the like will follow the pathways that many of the organised crime groups have in trying to funnel money through SLPs, because that is obviously not the same argument to be having, but the reality is that SLPs and the framework that they provide would allow for avoidance to take place, and we should all want to do everything that we possibly can to limit that.
Up to now, I think it was reasonable to say that the Government’s record on SLPs has not been good enough, to put it mildly and candidly. I hope that a recognition of our proposal in new clause 11 with regard to SLPs will be taken on board, out of a commitment to end the sorry practice of those partnerships.
I thank the hon. Gentleman for his contribution to the debate on this clause and for the points he has made.
It is worth pointing out a couple of things. First, I have talked a little about the Government’s record on issues of avoidance. The hon. Gentleman talked about cynicism. What is interesting is that the public are perhaps more discerning than he thinks, and I do not think that there is cynicism about this issue. In fact, although I have not looked at any polling on this issue, I think the public are generally highly supportive of this measure. It is not a tax on retail; it is a tax on user-generated content. However, the understanding that there was a problem in the application of international tax rules and that it needed to be addressed is widespread, and I think there is a recognition—for those who would get their heads around this tax—that this measure is part of a response to that problem, as indeed is the wider OECD programme.
I perhaps did not convey it correctly, but I think the cynicism will derive from the fact that the public will not regard the levels that are being put in place as sufficient to bring in the revenue that they should. These companies have benefited exponentially in recent years, and the figures that the Government expect in terms of revenue pale into insignificance compared with the revenue that these companies ultimately bring in. I think that is where the cynicism will arise.
There are two points here. One is the question of what the right level is. As we have discussed, this tax is designed to raise what by any other standard would be a pretty substantial amount of revenue— £2 billion over five years—and at the same time to establish a category of taxation that, in and of itself, is an important category. We have talked about some of the wider philosophical implications of that with my hon. Friend the Member for Aberconwy as well, so I think there is recognition of it.
Of course, it is also worth saying that, in relation to Scottish limited partnerships, the Government have recognised the problem, we have consulted and considered, and we are framing a legislative response to it. So there is also recognition of that problem.
The effect of the new clause would be to require the Government to report to the House, within six months of the Bill’s passing into law, the effect of the DST on tax revenues, and in particular the effect on the tax payable by the owners and employees of Scottish limited partnerships. Of course, this is a tax on groups, not a tax on individuals, whether those individuals are employees or owners; therefore, that is where the tax will fall.
In addition, DST payments will not be required until after the end of the relevant accounting period for each liable group, and thus payments will not be required until 2021. So the report that the hon. Gentleman describes would not contain any useful information. The DST’s reporting deadlines mean that very few groups would have needed to register and no groups would have been required to send in their return by that point. The report would not provide useful information about DST receipts.
We have talked about the importance of reporting and reviewing, but the effect of the new clause would be to pass a requirement to report with very little information and with very little purpose to it. I therefore commend clause 70 to the Committee and urge it to reject amendment 7 and new clause 11.