Commenting on the introduction of the tax in April 2020, chief economist Rain Newton-Smith said that there had not yet been a proper economic impact assessment of the tax.
“It has the potential to mean companies are less likely to become more digital, when the whole industrial strategy is supposed to be predicated on getting people to start and grow digital businesses,” she warned.
The tax is aimed at online marketplaces, social media platforms and search engines with a global turnover in excess of £500m. Digital giants like Amazon, Apple and Google will be charged at a rate of 2% on revenue they generate in the UK.
It is intended to be narrowly scoped to ensure that it is the tech giants, not start-ups, which shoulder the burden of the new tax.
Initially, Hammond had hoped that other leading economies would agree a joint way forward on digital taxes. But he ran out of patience last year and announced in the October Budget that the UK would be going it alone.
“It is only right that these global giants, with profitable businesses in the UK, pay their fair share towards supporting our public services,” he said at the time.
“In the meantime, we will continue to work at the OECD and G20 to seek a globally agreed solution and if one emerges, we will consider adopting it in place of the UK digital services tax.”
That has not happened yet. Despite the presence of digital taxes on the agenda for discussion at the recent G20 meeting in Japan, the best the G20 finance ministers could do was to aim to agree new rules on cross-border corporate taxes by 2020. This is not surprising, given the obstacles that need to be overcome – including fierce resistance from the US where most of the digital giants are headquartered.
Newton-Smith told the Telegraph that she was concerned the tax would catch more businesses in its net than originally intended. “The lines are blurred on what is a search engine or a social media platform and that is a challenge when you have a tax that is based on business models rather than on profit stream,” she explained.
“A 2% tax doesn’t sound like a lot but in a high-volume, low-margin business, it could wipe out your profits. When it comes to small businesses, adding to their cost base is not welcome.”
The CBI also told the government that its plans to become the world leader in internet regulation, set out in the recent White Paper, do not go far enough.
The business organisation wants to see a new independent regulator established as part of OFCOM, great clarity on the definitions, legal responsibilities and scope, proportionate and feasible enforcement measures and joined up government initiatives on tech policy and regulation.
It also wants digital literacy to be enhanced across business and the wider UK public.