Labour has abandoned plans for a £3 billion tax raid on tech companies such as Amazon and Facebook after being warned that the policy could result in a trade war with the United States.
Under proposals previously outlined by Rachel Reeves, the shadow chancellor, the party had pledged to impose a 10 per cent digital services tax on the revenues of predominantly American search engines, social media companies and online marketplaces.
The money raised was earmarked to fund a £3 billion support package to reduce business rates for thousands of small high street shops and businesses.
The idea has been ditched after warnings that it might provoke retaliatory trade sanctions from the Biden administration. It is the second recent change in Labour’s economic policy as the party tries to “election-proof” its plans in the face of Tory attacks. Two weeks ago Reeves reduced the scope of a proposed £28 billion a year green prosperity fund.
Under the digital services tax policy she outlined in 2021 and restated last September, Labour intended to increase the 2 per cent levy charged on the revenues of tech firms operating in the UK to 10 per cent, which the party said would raise £3.2 billion.
It said the money could be used to provide immediate temporary assistance to small businesses by increasing the threshold for their rates relief from the current threshold of £15,000 to £25,000. It also pledged to spend £1.6 billion from the new tax to speed up the benefits of a planned business rate review rather than bringing in the changes gradually.
However, the party said yesterday that it now had “no plans to raise digital services tax in government”, arguing that its previous announcement had been time-limited to last year and was no longer relevant.
It added that it was still committed to scrapping business rates and replacing them with a “fairer” system that “shifts the burden away from the high streets and more on to online giants”.
The move to scrap the tax follows industry concerns that it could breach the terms of an international deal struck less than two years ago to reform the way in which digital services are taxed. This committed the government not to increase the digital services tax beyond its current rate before a wider agreement on the taxation of multinational companies came into force.
Before the deal was struck the US had warned that it would impose trade tariffs on UK exports to cover the entire revenue raised through the digital sales tax. This would include imposing extra tariffs of up to 25 per cent on UK exports such as clothing, manufactured goods and beauty products.
One industry figure said Labour would have never been able to impose the tax without the US imposing tariffs on British exports.
“The Americans see these taxes as unfairly targeted at US firms,” they said. “It would not have been a great start for Labour’s relationship with the Biden administration.”
A Conservative source said the plan would have hit consumers and could have led to “retaliatory action from our allies”, adding: “No serious party of government would ever propose this.”
A Labour spokesman said that the party had “no plans to raise digital services tax”.
The spokesman added: “Our position on the digital services tax referred to the years of 2022/23 and 2023/24 and was a temporary measure, entirely within the rules of the international agreement, that we would be doing in that time to cut business rates and help our struggling high streets.
“In government, Labour have said that we will scrap business rates and replace it with a fairer more modern system that shifts the burden away from the high streets and more on to online giants. We have said we will set out more details on this ahead of the next election.”
