With the UK government moving to fundamentally change the way giants like Google and Facebook are taxed.
At the moment, Corporation Tax is levied on profits, but a recent government review has found that taxing a proportion of the sales would be, according to a Treasury minister, "a potentially preferred option".
As it stands
In recent years, there has been much controversy about the fact that companies like Amazon, Google and Facebook are generating significant value in the UK while paying very little tax. This has been the result of a series of tax-avoidance scandals involving those companies along with a current tax regime which is yet to get to grips with how to tax online activities fairly.
For example, in 2016, Google had sales revenues of £1bn in the UK but paid taxes of just £38 million. That was significantly higher than previous years following changes it made to the way it accounted for its activity in the UK. In 2017, Amazon made more than £7 billion in UK sales but paid just £7.4 million Corporation Tax.
What's going to change?
As a result of the review, the government intends to bring the UK's position on taxing internet companies in line with the EU, which is currently being led by France. They are attempting to introduce a tax on revenues which makes it much more difficult for tech companies to reduce their Corporation Tax bills by channelling profits between countries.
All the companies involved have made it clear that they abide by the current tax rules, but if the government were to introduce a tax levied on sales then it would increase the tax revenues significantly. The government has also made it clear that any changes will not apply to the many startup tech firms or other small companies in the UK that are working hard to turn a profit.
The importance of avoiding a ‘tax war'
With countries like Germany and France wanting to introduce taxes on revenues for digital firms and the European Commission coming up with its own proposals, the Organisation for Economic Co-operation and Development (OECD) has warned about tax wars breaking out.
If each country starts imposing different taxation policies then it could lead to digital firms being taxed multiple times on the same activity. Potentially, that could make countries like the UK less attractive for firms which already employ thousands of workers here.
The second big change in as many years
There have already been significant changes to the way American tech giants are taxed. In 2016, the then Chancellor George Osborne introduced the ‘Google Tax' on overseas profits. That led to companies like Facebook attributing more of its ad sales to other European countries, thereby increasing the amount of tax paid outside of Ireland.
However, although the tax bills of many of the tech giants have risen over the last couple of years, they still represent a very small proportion of total revenues. Despite further attempts by regulators to develop strategies to increase the tax paid by US tech companies, this is the first time a cohesive plan has been put in place.
Levelling the playing field for smaller firms
It has also been muted by some MPs that a fairer system for taxing the large tech firms could lead to tax cuts for smaller businesses, many of which are currently struggling to survive. Realistically, the new taxation on big tech could raise a few hundred million pounds, which although not a great deal in terms of government spending, could give the government the leeway it needs to do more for small businesses.
At the moment, these measures are still very much in the consultation phase, but with the UK being the second largest market after the US for many tech firms, it's important these steps are being taken to strengthen the UK's position. This is not about shifting the tax burden or stifling the innovation of the tech giants, it's simply a case of ensuring the system is fair for businesses of every size.
The Author Mike Smith is the senior director of Company Debt and a business insolvency expert with four decades of experience.
