Tax and regulation policy briefing

What does the General Election mean for tax and regulation?

While the daily churn of policy development may slow during a General Election, the party manifestos provide plenty of food for thought for the CBI team.

They are not set in stone of course, and may change once a party is governing, but they do offer a good indication of the priorities for the upcoming administration, as well as an opportunity to assess the impact the CBI has had.

This year was no different and the CBI impact could be seen throughout the manifestos: all major parties recognised the need for fundamental reform of our broken business rates system, and both the Conservatives and Liberal Democrats recognised the importance of the R&D tax credit in spurring private investment and pledged the increase in scope. This was a cornerstone recommendation in our report, Untapped Investment, published over the summer.

But there were also challenging announcements for business, with a pledge to implement the Digital Services Tax by the Conservatives (and a pledge to increase it from the Liberal Democrats) and a pledge to phase out the R&D tax credit by the Labour party. You can read our full analysis here.

CBI responds to OECD consultations on tackling the tax challenges of digitalisation

As highlighted in last month’s update, after months of extensive consultation with stakeholders (including governments, businesses and NGOs), on 9 October 2019 the OECD Secretariat released its consultation on a proposal for a ‘Unified Approach’ on Pillar 1 of their Programme of Work: to develop a consensus solution to the tax challenges of the digitalisation of the economy. 

The proposal stretches far beyond just impacting tech companies and focuses more broadly on multinational consumer-facing businesses, seeking to grant new taxing rights to jurisdictions in which consumers are located. With this comes the potential for these proposals to represent a significant shift in the taxation of multinational companies, including where they are subject to tax.

In November, the CBI submitted a written response to the OECD’s consultation on the Unified Approach and attended the Public Consultation in Paris to highlight the need for centralised administration (via a One Stop Shop) to limit the compliance burden for business and to reduce the risk of double taxation arising.

November also saw the release of a separate consultation on Pillar 2 of the OECD’s wider programme of work, which focuses on a global anti-base erosion rule to address scenarios which may enable multinationals to shift profits to no or low tax jurisdictions. The CBI will be providing the UK government and OECD with the views of business on this in early December.

However, this is not the end of the road, extensive work is expected to continue on both Pillar’s 1 and 2 throughout 2020 as countries seek to reach a consensus position on the broad architecture of the proposals. If this is an issue that might affect your business then why not get involved.

The U.S. flexes its muscles on unilateral digital taxes

Hot off the press, at the start of December the U.S. Trade Representative (USTR) concluded the first section of their inquiry into the French Digital Tax and concluded that it discriminates against U.S. companies, is inconsistent with prevailing principles of international tax policy, and is unusually burdensome for affected U.S. companies. In response they are proposing 100% tariffs on French goods – there will be a hearing process that will last until mid-January where comments can be submitted, in particular on products against which tariffs should not be levied.

They have also noted that the USTR is exploring whether to open similar investigations into the digital services taxes of Austria, Italy, and Turkey – there is no mention of the UK at this stage. It will be interesting to see how the next UK government, the EU and the OECD react to this decision over the next few months.

HMRC treaty stakeholder consultation

In November, HMRC published their annual consultation seeking views on the UK’s double tax treaty negotiation programme for the coming year. This was an opportunity to highlight gaps in the current UK tax treaty network, for which many members noted Brazil was a significant omission. It was also an opportunity to highlight the importance of prioritising negotiation of the grandfathering of current withheld tax rates provided by the EU Directives (including the Parent-Subsidiary Directive and the Interest and Royalties Directive), which on the UK’s exit from the European Union (EU), unless agreed otherwise, UK companies will lose access to.

Public Country by Country reporting rejected at EU Competitiveness Council

On 28 November, a vote was held in the EC Competitiveness Council on introducing Public Country by Country Reporting (CbCR) in the EU. The vote did not pass with 12 member states voting against the motion and two abstaining (including the UK). However, a number of those member states voting against, did so on the basis that Public CbCR should be dealt with in the Economic and Financial Affairs Council not the Competitiveness Council and therefore we could see this matter come back in the near future.

Public CbCR is a proposal for the mandatory publication of a defined set of facts and figures by large multinationals on their tax affairs. At present HMRC have access to CbCRs but these are not made publicly available.

The CBI continues to raise its concerns in both the UK and Brussels, that Public CbCR could risk adversely affecting the competitiveness of European businesses and to ensure our competitiveness and attractiveness as a global trading nation, every effort should be made to coordinate and synchronise actions internationally across all countries.

Employment status guidance receives welcome updates

The CBI is one of the few organisations to have been sent the draft off-payroll working (IR35) employment status guidance by HMRC for comments prior to its public release.

The feedback from businesses on the draft guidance has been positive in the respect that the detail provided has been explained in relatively simple terms and that our previous feedback on areas that must be covered are incorporated within the draft guidance.

However, the challenge still remains that, due to the postponement of the Budget and associated Finance Bill, businesses are still waiting for the government to formally respond to the earlier consultation on the policy and for the finalised legislation. As the policy is theoretically due to come into force from April 2020 this gives little time for businesses to adapt to the changes. With some political parties committing to review the legislation as party of the campaign pledges businesses are left uncertain about how to react.

HMRC release revised Check Employment Status Test

The Check Employment Status for Tax (CEST) tool update has been released by HMRC to help businesses undertaking IR35 assessments. CBI members have worked closely with HMRC in developing the tool over the last few months.

The CBI has been a key stakeholder in the development of the HMRC CEST tool working with HMRC through:

• 1-to-1 meetings for members with HMRC to discuss their concerns with the tool directly
• HMRC roundtable invitations for CBI members to attend updates for the development of the tool
• HMRC attending the Employment taxes working group (ETWG) to walk members through the new tool prior to its release.

The close relationship between HMRC and the CBI and its members on this topic directly impacts policy, helping ease the IR35 implementation process for all businesses.

December to bring some clarity over the future direction of tax and regulation

Looking through the detail of the party manifestos, it is clear that there are a wide number of potential paths the UK’s tax and regulatory regime could take. On the one hand, the Conservatives have espoused the need for deregulation, risking a potentially decoupling from alignment with the EU and revisions to businesses taxes aimed at driving investment. On the other, the Labour party want to see higher taxes on businesses, far fewer reliefs and state intervention in markets where they view regulation to have failed. The Liberal Democrats perhaps sit somewhere in the middle on this spectrum of outcomes.

For business, such a wide range of outcomes makes it difficult to plan and make decisions. The corporate tax roadmap was welcome because it provided a clear path, stability and a level of certainty. The outcome of the election will give some clarity to the path the country has chosen, although nothing is ever guaranteed in politics.

It remains unlikely that a new government would run a Budget process in the last week of December, so I think we can expect one to take place early in 2020. Boris Johnson has suggested it might take place after the next Brexit deadline in February.