Internet companies shielding revenues made in the UK by directing traffic abroad faced a new tax crackdown in today’s Budget.
Chancellor Philip Hammond announced an extension to the so-called ‘Google tax’ which allows the Treasury to collect tax on profits made by search and social media companies in the UK but via systems based overseas.
The new change will ensure Britain can collect revenues on searches carried out in the UK even if they are redirected via a third country and not just straight to a tax haven.
Treasury sources hailed the ‘innovative and novel’ change, designed to tackle a new tactic employed by internet firms to add an extra leg to redirecting activity off shore.
They said it would help address growing public concern in the aftermath of the leak of the Paradise Papers revealing mass offshore tax avoidance by the rich and famous.
Chancellor Philip Hammond announced an extension to the so-called ‘Google tax’ which allows the Treasury to collect tax on profits made by internet companies on activity in the UK but via systems based overseas
The new tax applies, for example, if someone carries out an internet search in the UK using software based in the EU and channelled via a tax haven.
When ex-chancellor George Osborne set up the tax, it was aimed at searches carried out in the UK via systems based directly in the tax haven.
The new measure allows the UK to exploit bilateral tax agreements with more than 100 countries to lay a claim to the revenue – raising more than £500million in extra tax over the next five years.
Announcing his change, Mr Hammond told the Commons today: ‘There is a wider concern across this House and in the business community about the tax system in the digital age.
‘Along with the innovation and growth that it brings, digitalisation poses challenges for the sustainability and fairness of our tax system.
‘But this challenge can only be properly solved on an international basis.
‘And the UK is leading the charge in the OECD and the G20 to find solutions.’
Reforms established by George Osborne allowed HMRC to collect tax on revenues earned on UK digital search activity even if it was generated via software working off shore.
Companies, including search engines such as Google and social media firms, got around the new tax by running the activity via a third country.
The source admitted the third country could collect the tax themselves and stop it being returned to Britain meaning revenues decline over time.
Treasury sources hailed the ‘innovative and novel’ change, designed to tackle a new tactic employed by internet firms such as Google (file image)
But they said the Treasury hoped the internet firms would be forced to effectively on-shore activities taking place in Britain anyway.
The source said: ‘This is not a silver bullet for all of the public’s concerns about the digital economy.
‘There is much more to do but this is a sensible and pragmatic measure.’
Mr Hammond also said he would hold online marketplaces responsible for paying value-added-tax – a form of sales tax – when sellers on the platforms do not collect and pay the tax.