Revenue officials are not paying enough attention to a new tax on big tech firms’ earnings in the UK and are therefore failing to scrutinise potential avoidance, parliament’s spending watchdog has warned.
While the digital services tax brought in a surprise bumper income in its first year, MPs on the cross-party public accounts committee says this suggests HM Revenue and Customs officials had failed to properly understand its impact.
The PAC warns in a report published on Wednesday that British tax authorities are at risk of ignoring whether the levy is designed in the best way because they only intend for it to be temporary.
The tax, which imposes a 2% charge on digital revenue generated in the UK, was introduced in April 2020 as a way to stop the world’s biggest technology companies, including Google, Apple and Amazon, avoiding tax by shifting profits overseas.
The National Audit Office (NAO) found last year that it generated 30% more than expected in its first year of operation – though members of the PAC warned that was not necessarily a good sign.
Sarah Olney, the Liberal Democrat chair of the committee, said: “The fact that the DST generated so much more than HMRC had predicted suggests there is some kind of flaw in their forecasts. If there is a flaw in their forecast, how can we really know whether companies are managing to avoid it?”
She added that the committee was concerned that officials were not doing enough to monitor the implementation of the tax because it is due to be phased out once a global system is introduced. “This is a holding tax,” Olney said. “The risk is that because of that, it is not being reviewed properly and levels of avoidance and evasion are not being properly scrutinised.”
The DST was introduced in 2020 after years of complaints that multinational technology companies were minimising their tax payments by registering the profits from UK sales in low-tax regimes such as Ireland and Luxembourg. It is targeted at the companies with worldwide digital revenues of more than £500m and with revenues derived from UK users of more than £25m.
It aims to eradicate that by taxing revenues rather than profits, but it will be replaced by a global tax on digital profits that is being negotiated by about 400 companies at the OECD. The US, where most of the tech companies affected are based, has objected strongly to other countries implementing digital services taxes such as the UK’s.
Last year the NAO found that 18 companies had paid DST, collectively handing over nearly £360m – more than they did in corporation tax. But 90% of that income came from just five groups, the NAO said, with 15 contributing less than expected, including 11 that paid nothing when they had been predicted to do so.
Officials told both the NAO and PAC that the tax payments had been affected by the Covid-19 pandemic, which saw some online companies benefit from people spending far more time on the internet than expected, while others such as travel companies were hit badly.
The PAC report warned that the varying impact of the tax could become a problem the longer negotiations at the OECD drag out, with implementation having already been delayed a year until 2024. MPs also said they expected companies to become better at avoiding the tax the longer it is in place.
Olney said: “We think that because this is a temporary tax, officials are not paying sufficient attention to how it is working.”
A government spokesperson said: “The Digital Services Tax has proved highly effective at taxing the UK revenues made by online businesses ahead of new international rules.
“HMRC has an extremely strong track record on multinational tax compliance and actively challenges them on tax due. Between 1 April 2016 and 31 March 2022 HMRC brought in over £66bn by effectively policing the tax rules as they apply to the largest businesses.”
• This article was amended on 5 April 2023 to include a comment from a government spokesperson that was received after publication.
