Tax and regulation policy briefing: May 2019

While it can sometimes seem like Brexit dominates the headlines and the UK’s policy agenda, the world of tax and regulation certainly hasn’t seen a quiet month.

An international approach to digital taxation

On all levels, there has been a flurry of activity as governments try to answer the question of how to make the tax system fit for a world where digital has become the primary channel through which business operates. The UK government feels it needs to act now with the introduction of its own Digital Services Tax (DST) and we’ve been having regular engagement with the Treasury on their proposals. The EU have decided to wait and see if progress can be made at the global level, shelving plans for its own DST until 2020. This is welcome news; the CBI has long believed that the OECD is the right organisation to effect the changes needed. Digital markets are truly global, as are the companies that operate in them. That makes international cooperation at the highest level the only way to reform the system, in a way which doesn’t create a patchwork of complex measures that increase cost and reduce efficiency, to the detriment of business and consumers.

On this front, the CBI has responded to the OECD’s consultation ahead of the Inclusive Framework meeting in May, where countries will review feedback from the consultation, and consider narrowing down or amending the reform options based on the results. This meeting is a significant milestone ahead of the OECD’s presentation of its interim report to G20 Finance Ministers in June, where they hope to get agreement on their proposed approach. Much will hang on international political relations, but for businesses around the world, this is the next step towards a fundamental shift in how they are taxed globally. The UK Treasury are very keen to hear from businesses ahead of the meeting and we will be actively feeding back your views.

Making tax digital

Making Tax Digital – a new requirement for businesses to keep records digitally and use software to submit their VAT returns – also went live for VAT from 1 April. For many businesses, particularly SMEs, this means a significant change in the way they interact with HMRC. There have been several news reports, as accountancy firms raise the alarm, that a large number of firms still haven’t implemented the changes needed, but thankfully, at the Spring Statement, the government announced it would take a light touch approach to penalties in the first year of implementation. This is something the CBI called for in its response to the publication of HMRC’s draft notice.

A digital focus for the Spring Statement

The Spring Statement also saw the release of the Furman review into competition in digital markets. Within the 150-page report was a recommendation for the establishment of a new digital markets unit. This is the first real step to regulating competition in digital markets and the impact that company behaviour in these markets has on consumers. The review was well-balanced and whilst recommending increased regulation, called for this to be set against cost and efficiency as well as the benefits that these new digital markets have brought. At a recent event which the CBI attended, one of the review panellists revealed that they purposefully left this recommendation open as to whether this would be an independent body, part of BEIS, the CMA or another organisation. They also revealed that the review panel believed that there hadn’t been sufficiently strong scrutiny of mergers in the tech sector on a global scale. The government will be responding to the review in the Autumn.

There is still much to be decided about the detailed design of any new regulation but businesses operating in these digital markets or affected by them indirectly will want to watch future developments closely.

HMRC are open to change on the way they manage relationships with large businesses

Since publishing our on improving the relationship between HMRC and business last year, we’ve been having regular meetings with HMRC on our recommendations. One of the areas they have agreed to take forward is a review of the Customer Compliance Manager (CCM) handover processes. Our work with businesses has highlighted that there are vastly different experiences of the quality of CCMs and the handover process, with many reporting information being requested multiple times, adding administrative cost to businesses. HMRC are starting with an internal review and would like to have some conversations with business directly. We will be holding a workshop with members once firm proposals are on the table – so keep an eye on the Get Involved page of My CBI in the coming months.

A revised funding code for defined-benefit pensions schemes

Following well-publicised examples of bad practice, the Pensions Regulator is revising its code of practice for the appropriate funding of defined-benefit pension schemes. So far, they have confirmed that they will provide greater clarity on what ‘good’ looks like within scheme specific funding regimes. This will involve a ‘comply or explain’ regime in which the regulator will have the potential to intervene if a scheme is not compliant with the code. The new code will require all defined-benefit schemes to set out a clear ‘long-term funding target’. The regulator will expect schemes to evidence that their shorter-term investment and funding strategies are aligned with the target. This will result in new requirements for any business with a defined-benefit pension scheme to ensure they are compliant. The objective of the review is to limit the risk of improper financial management of pensions schemes resulting in pensioners losing their savings.

There will be a public consultation on the new code later in the year, but the CBI is arranging meetings for the regulator to test its plans with businesses in advance. Opportunities to input will be highlighted on the get Involved page in the coming months.

CBI forms an action group on Labour’s inclusive ownership proposals

Following the announcement of a new Inclusive Ownership Fund by John McDonnell MP at last year’s Labour Party conference, the CBI has started a project to tackle the challenges this proposal presents for business. The CBI has already publicly warned of the risk this proposal poses to the UK’s investment environment, on top of Labour’s nationalisation plans. Carolyn Fairbairn has discussed the proposal with the Leader of the Opposition and the Shadow Chancellor, and they have shown an openness to discussing the policy with businesses.

However, our most recent conversations with them have revealed this is still very much a live issue, and they believe a way to fund other policy ideas such as their National Transformation Fund. We’ve also been speaking to the government who have shown an interest in considering changes to the current tax policy framework for employee share schemes. We will be making some strong interventions later in the year, with some firm policy proposals at the Autumn Budget. As a member, you can contribute to the debate on inclusive ownership policy here.

What to expect from the month ahead

The CBI’s business rates conference

The recent trials of many high street chains have yet again highlighted the major shortcomings of the business rates regime. But this isn’t just a retail issue; it is a problem that must be solved for the whole economy. From manufacturing, to warehousing and professional services, so many businesses are facing rising costs from the tax and a disincentive to invest. Next month, CBI President John Allan will be making a speech at our business rates conference (where we also have Mel Stride MP, Financial Secretary to Treasury, giving a keynote) calling on the government to take urgent action to tackle to issue. We’ve submitted evidence to the Treasury Select Committee’s enquiry and met with Nicky Morgan MP and TSC clerks to discuss.

Progressive business rates that work for everyone is one of the CBI’s key campaigns, and while there have been positive steps made in the past to ease the burden, including introducing more regular revaluations, there is still much to do to make sure this tax is fit for a modern, forward looking economy.

The CBI response to new employment taxation proposals (IR35)

We are also finalising the business response to the government’s consultation on the introduction of new employment taxation (IR35). This will extend the rules operating in the public sector to private businesses, creating increased risk and potentially liability for those businesses who use personal service companies to access specialist labour. Our response to government will continue to highlight the lack of evidence on how this policy has impacted the public sector, and therefore the potential consequences for the private sector, as well as the additional administrative burden this adds to businesses. The current design of the policy would result in significant uncertainty for business’s tax positions, meaning increased costs as firms try to mitigate the risks. Alongside the formal process, we’ve been working with HMRC on improving the Check Employment Status for Tax (CEST) tool, holding a workshop with CBI members.

Staying on the theme of employment tax, at some point in the next few months we can expect the government to publish its proposals on how it intends to align tax and employment rights status, following the publication of its Good Work Plan. This could look at introducing the worker status into the determination for tax status. The CBI will be feeding in member views directly to the Treasury.

Following on from our report, Funding our Future, which engaged both financial services firms and their business customers to explore how we can make the sector work better for the whole economy, the CBI has established a Corporate Forum. The Forum provides a space for non-financial services companies to discuss how financial services policy is affecting their businesses, identify priorities for CBI participation in Business Europe and develop policy recommendations for government. This will sit alongside the existing working group for financial services firms so that the CBI has a holistic view of the impact financial services tax and regulation policy has on the UK economy.  Find out more about how to join the Financial Services Corporate Forum.

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