A tax system for the digital age is needed

Post by 
Harry Vazanias
August 24, 2018

f the UK government really wants to be digital, it needs to transform how it taxes businesses today. Without this many long-standing businesses selling viable products will be forced out of business leaving foreign based digital companies to thrive, with jobs and tax receipts dwindling.

The issue is that today’s taxes are based on centuries old thinking, with economists, accountants and government officials too scared to fundamentally change what has always worked in the past. The problem is that digital changed the landscape almost overnight, and the old ways are no longer fit for purpose.

One of the most visible taxation issues is in retail, where high business rates penalise brick and mortar retailers compared to pure online retailers. Look at M&S, Debenhams, House of Fraser and Poundland – they are all closing stores or, worse, closing down. Footfall is falling, and the amount of people going into stores to simply see and try goods before buying elsewhere online is going up. Rates are too high and are hindering the high street from competing with pure online retailers who can offer goods more cheaply and achieve higher margins. This is bad for the economy because it sends it into a downwards spiral of less stores, less jobs and less taxes overall.  The government needs a new taxation approach which taxes retailers fairly be they brick and mortar or pure digital. So far there has been little action here despite calls for change which started at least a decade ago.

Tax issues are not just focused on retail and business rates though. Pierre Moscovici, the EU commissioner for tax, was quoted by the FT as noting: “our pre-Internet rules do not allow our Member States to tax digital companies operating in Europe when they have little or no physical presence here”.  The current taxation rules enableDigital native companies to more easily position their base to be wherever the cheapest taxes exist. This means they pay the amazingly low tax rates we’ve all read about, and very little of this tax goes to the HMRC.

This isn’t the fault of the digital companies – they are simply obeying the rules in the smartest way. You can question their morality(Google’s famous goal of ‘do no wrong’ could be quoted here), but you can’t say that they are cheating. The tax rules are at fault. The government needs to address these.

I recent years the government have made great strides forward with being more digital. The Government Digital Service (GDS) is a good example, working in an Agile way and putting services online. However, more is needed and the priority should be a shake up of our tax system. Just as many long standing businesses are needing to adopt new business models to survive in the digital age, so does the government need to rethink the taxation model.Tweaks are not good enough. We need a major new approach. I’m not pretending to know the answer, but I would like to see more proactive and innovative thinking on this topic coming out of Westminster. When the most innovative idea comes from Jeremy Corbyn who wants to tax tech firms so that he can better fund the ‘unbiased journalism’ from the BBC, you really do have to worry.

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