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Government ‘making progress’ on a new way to tax digital businesses, as Chancellor rules out business rate changes

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Chancellor Philip Hammond has said, in a letter published this week, that the Government is ’making progress’ with a way to tax digital businesses. At the same time he ruled out changing the way business rates work.

Hammond was writing to MP Nicky Morgan at the end of June in her capacity as chair of the treasury committee, in answer to her letter expressing the committee’s concerns with the financial burden of business rates and asking whether he believes that business rates are still fit for purpose.

In his letter, he said that the Treasury’s 2016 review of business rates had resulted in the decision to keep business rates as a property tax. 

“Respondents to the review agreed that property-based taxes were easy to collect, difficult to avoid, relatively stable compared to other taxes and had a clear link with local authority spending,” he wrote. “They also raise revenue in a way that is less distortionary than some other taxes. There was no consensus on an alternative base, and even those respondents that put forward alteranatives were clear that these tax bases were not without their own issues.”

Hammond added: “However, I have been clear that we need to find a better way of taxing the digital economy, and we are making progress on this issue. At Autumn Budget 2017 we published a position paper on corporate tax and the digital economy, with a further update at Spring Statement. Those set out the government’s view that international corporate tax principles need updating for the digital age to ensure they reflect the new ways businesses create value. It is right we make further progress on this issue before considering the implications for the wider tax system, including business rates, so that all businesses make a fair contribution to the public finances.”

Commenting on the response today, Morgan said: “It’s clear that many bricks and mortar stores are struggling to remain competitive against online retailers, with the Chancellor admitting that business rates can represent a high fixed cost for some businesses.

“The Treasury Committee is increasingly concerned with the financial burden that business rates are placing on high street businesses, and has examined the issue in its inquiries into VAT and the VOA. We are likely to scrutinise business rates further as part of our Autumn Budget inquiry later this year.”

Helen Dickinson, of the British Retail Consortium, which earlier this week said the business rates system was no longer fit for purpose, said today: “We recognise that business rates reform and wholesale modernisation of the business taxation system is complex. However, the retail industry is looking for concrete action from HM Treasury, beginning with a two-year freeze in business rate increases and a firm commitment for wholesale reform alongside other business taxes. This would recognise the challenges the retail industry is facing and would allow a period of headroom during which industry and Government can consult on a fairer, more proportionate system of business taxation.”

Commenting, Ivan Mazour, chief executive of Ometria, said: “After all its talk of bolstering the UK’s digital economy, the government’s proposed ’digital tax’ on online retail is a perplexing one, certainly.

“Punishing forward-thinking retailers for offering customers convenient ways of shopping in an increasingly digital world flies in the face of innovation – and only serves to prop up a status quo in bricks and mortar retail that isn’t resonating with customers like it used to, if recent cuts and closures are anything to go by.

“Instead of dragging UK online retail back into the dark ages, the onus should be on the high street to match the innovation we’ve witnessed online. In the same way that successful online retailers are putting amazing customer experiences at the centre of everything they do, the high street must re-think its proposition to shoppers – innovative retailers like and Dyson who use retail space to offer curated brand experiences understand this and are thriving.”

Image: Fotolia

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