Financial Secretary to the Treasury on cryptocurrency, Brexit and taxing the digital economy

Financial Secretary to the Treasury on cryptocurrency, Brexit and taxing the digital economy

Accountancy Age caught up with Mel Stride, the Financial Secretary to the Treasury, to discuss cryptocurrency, Brexit updates, the EU proposed digital tax, the changing workforce, and what keeps him up at night

Accountancy Age caught up with Mel Stride, the Financial Secretary to the Treasury, to discuss cryptocurrency, Brexit, the EU proposed digital tax, the changing workforce, and what keeps him up at night.

As it’s the beginning of the financial year, what are some of the most important tax changes that people should be aware of?

Well the first one is that there’s been a change to the personal allowance. So we’ve put that up to £11,850, and we will be continuing to increase that personal allowance going forward to 2020 when we reach £12,500. We’ve already taken about £3m taxpayers out of tax altogether, rising to about £4m by the time that we finish with that. I think that’s a very important tax change.

We’ve brought in the national living wage (NLW) increase as of 1 April. That’s a 4.4% increase, so that’s going to do a lot to help particularly the lowest paid in the country.

And I think something we should be very proud of is that the very lowest paid, because of the NLW and increase in the personal allowance, have seen their real wages increase by 7% above inflation compared to 2015. So both of those measures have really helped those that are struggling, so I’m very pleased about that, although there’s more work to be done.

We’ve also seen corporation tax coming down. So we started at 28% in 2010 for big businesses, 21% for small and medium sized companies, and we’re now down to 19% and we will over the next two years reduce taxes down to 17%. So that’s all part of driving economic activity, getting those businesses out there, creating growth, creating jobs.

There’s some fantastic ONS data on jobs yesterday, we’ve got the largest number of people in employment in the history of this country, more women in work than ever before, lowest level of unemployment since 1975– you’ve got to go back over 40 years to get to as low as we are now. And of course we are still pushing down on the deficit, which we’ve reduced by three-quarters.

What the Office for Budget Responsibility (OBR) are saying, and the projections they gave us at the time of the Spring Statement, was that over the next few years we will see wages continue to rise so I think we’re at a kind of, I would cautiously say a potentially positive turning point now, in terms of the pressure that people have been under in terms of a squeeze of real wages. I think that’s really an exciting moment, but we’ve still got some way to go.

So all really positive.

Yes, I feel, to use the Chancellor’s expression, a little Tigger-ish. But not too Tigger-ish!

You mentioned the Office for National Statistics (ONS) data, which also said that the rate of inflation had fallen to 2.5% in March, its lowest in a year. Could you give me a little bit of context around this drop, and do you expect this trend to continue?

I think the over-arching reason is the exchange rate slump in the middle of 2016 after the result of the referendum is now sort of working its way through, so it’s a one-off increase in the general price levels working its way through the system.

Specifically, in terms of the drop between February and March, which was from 2.7% to 2.5%, a lot of that was down to footwear and clothing prices, apparently, rising less quickly then they did this time a year ago.

However on the up side, pushing up a bit, were recreation and cultural activities, or something of that nature, so I assume that’s museums and zoos and things. But it’s great news. So inflation was at 3.1% in November last year, then fell to 2.7% in February, now it’s down to 2.5% and the projection from the OBR is that it’ll be at 2.1% by the end of this year. So those kinds of things can make a big difference with the way people start to feel about the spending power they’ve got. It is a reversal of the direction we’ve been in for the preceding period.

The Chancellor recently announced the creation of a cryptocurrency task force, a joint venture between the Treasury, Financial Conduct Authority (FCA) and Bank of England. What kind of risks and opportunities will the task force be looking at?

It’s very early days. We’re very interested in cryptocurrencies for at least two reasons – one is that they do potentially represent some area of risk around illegal activity. It’s very difficult to actually trace transactions as opposed to transactions that are going through a centralised bank and a clearing system, where you can see what’s going on. So there’s that dimension to it. There’s some risks around speculation and the fact that these currencies tend to be extremely volatile in terms of their value. Those are the things on the downside.

But there are mainly opportunities around the underlying technology– so the distributed ledger technology, blockchain, encryption technology and things that are used may themselves have applications even outside crypto-assets, so those are things that the task force will look at. It doesn’t yet have a particular remit as such, so the terms of reference haven’t been set, I don’t think they’ve met yet. So it is very early days but it’ll be interesting to see what comes out of it.

What is the Treasury’s view on the best approach to the tax treatment of cryptocurrencies?

Well as things stand at the moment, if you own BitCoin and you pay say £100 for a BitCoin and sell it for £1,000, that would fall due to capital gains tax. So, as far as the Treasury and HMRC are concerned, these are taxable gains when they occur.

There is a growing conversation around how to best tax the digital economy, and the EU recently proposed a 3% tax on revenue for digital companies. What is the Treasury’s perspective on this?

We’re very interested in this because what we want is a fair tax system. What we’re seeing is a rapidly changing economic environment in terms of the way businesses do business, and we really have got an international tax regime that is set up for what I call “conventional businesses”– so tax falls due in a multinational operation where the main economic activity occurs. So where the plants are, the people are employed, where the intellectual property rests, where the decisions are made, where the risks are taken, etc, that tends to determine in which country the profits are taxed. And if you look at some of these digital platforms, of course, they don’t have that kind of economic footprint in a country but are generating a large amount of value within that country.

You could be a search engine, you could be an online marketplace, you could be a social media platform, and you may not have staff here or much of a physical presence but you’re generating a lot of value because you’ve got an interaction with UK consumers or users of that site. Our argument is we need to change the tax regime to actually allow us to tax fairly that value that’s created on those kinds of businesses. So that’s not to say those businesses are in any way avoiding tax right now, they’re not. The tax regime itself doesn’t really capture the value that they’re generating.

But to get back to your EU question, we’ve been part of those discussions. They’ve come forward, as you know, suggesting a 3% revenue tax, subject to a threshold of companies with €750m worth of worldwide turnover or above, and €50m revenue within the EU.

We think that’s interesting. And the best way forward is on a multilateral nexus, but if we can’t get a multilateral agreement then we are prepared to do something unilaterally to start to address this.

Because there’s a big point of fairness here, because if you look at a lot of high streets where they’re paying business rates on premises and they’re often struggling, it seems to us that when it comes to the burden of taxation it should be equally borne by those who are using a digital platform for that kind of business.

So the tax system needs to catch up to the changing face of business.

Yes, exactly. Which actually makes tax in many ways very interesting. A lot of people glaze over when you talk about tax, but actually it’s a completely changing environment and the tax base itself is being challenged and eroded in all sorts of different ways, and part of what we’re doing here is to catch up with that, and where we can, stay ahead of it.

So for example, the way that people work– there has been huge growth in people providing their services through a service company. So whereas effectively they’re employees, they’re effectively turning up to work at the same place every day, getting holiday entitlement, they’re basically employees and yet they provide that service through a company because they get a better tax treatment. So that’s something that’s of concern to us and we’re clamping down on that. That’s just one change in the way that work happens nowadays. The gig economy is another thing, and Matthew Taylor’s review.

Who knows where it’ll end up. I’ve just had a very interesting discussion session with the All-Party Parliamentary group on tax and somebody said “what’s the world of tax going to look like in 10 or 20 years time?” And the honest answer to that is I haven’t got a clue.

It might be all the companies being run by artificial intelligence and robots and driverless cars and in fact very few people working, and it’ll be thinking less about taxing things and more about how to distribute the wealth that’s being created in this extraordinarily different economy. So it’s a bit of a rollercoaster ride to try and work out exactly where its all going.

In terms of off-payroll working, are there plans to extend IR35 rules to the private sector?

We are going to consult on it and we will await to see what comes back from the consultation. What we do know is that the cost to the Treasury of people being non-compliant with IR35 is very significant, we think, in the private sector, certainly north of a million pounds in lost revenue. So it’s an important thing. And once again, its an issue of fairness. We’ve already got it in the public sector and it seems to have worked well there. But we have an open mind and it’s certainly something we will be looking at the consultation responses very carefully on and not rush into any early judgments.

Can you give any updates on Brexit negotiations from your side?

Well, the implementation period has been in principle agreed, so we’ve got this run up to October and hopefully we’re going to sign the whole deal off then. I think that’s really important, as this has now given us till the end of 2020 instead of April of next year in which to get ourselves ready and certainly the feedback I’ve had from business has been extremely positive and relieved on that.

There’s still a lot of work to do on the final deal, and there are a number of tricky outstanding issues, a number of them in the area I’m responsible for around customs, the Northern Ireland– Ireland border issue for example, and what kind of customs border arrangements we’re going to have with the EU.

But my mission here is to make sure that HMRC is ready for day 1, so even if that implementation period were to fall apart, which I’m absolutely sure it won’t, but if it were and we were out in 2019, we would be ready with a functioning border and that trade would continue, Dover will still have all the trucks moving off it and all those good things would happen. So I’m confident that will be the case. But hopefully we’ll have longer, till the end of 2020.

What will be the Treasury’s approach to VAT and customs duty post-Brexit?

I can’t really comment on that, because it’s a discussion here for another day. But clearly we will have far greater flexibility in how we choose to run our VAT regime, there are a number of things around VAT that people are calling for here that we can’t have due to current EU arrangements. We’ll look at varying rates for different goods for example, there’s often a push for tourism and hotels or particular parts of the country to have a more favourable VAT rate, and our current situation is that we simply can’t do that due to EU regulations. All of that will open up once we’re out. But quite where that will lead us, at this stage, I don’t know.

And during the transition period will things be kept as is?

I think things will be kept exactly the same. I think the idea is that we will make one set of the changes at the end of 2020, so the VAT regime and all the other things will stay the same during that period.

Can you give us an update on the progress with the Making Tax Digital (MTD) initiative?

As you know MTD will be rolled out for VAT initially in 2019, for companies that are VAT-registered, so above the VAT threshold. It’s being piloted at the moment and later this year the pilot will go public so we will be inviting any business who wants to get involved. It’s going well and I’m confident that on day one we will be ready and up and running.

With the VAT, bear in mind you are not dealing with the very smallest companies because of course only companies with turnover over £85,000 are VAT-registered, and with that they are already registered, making quarterly returns, and are used to doing that. So it’s really just a step of instead of doing it on a spreadsheet or piece of paper, plugging it in to a piece of software. So I’m very confident that it’s going to be okay.

Right, it should make life easier in the long run.

It should do, and that should be the test of it. There was a time we used quills and parchments and carrier pigeons and things, and I’m sure there were advantages to that but no one would seriously say we should carry on like that now. So I think we’ve got to leap into the 21st century.

But it’s got to work for businesses as well as for HMRC, and that’s the bit that I really get. It can’t just be something that makes life easier for the tax authorities or we collect more tax as a consequence. We’ve got to do that because we’ve got to eliminate error, its costing about £9bn per year, through people making oversights and filling things in incorrectly, we’ve got to try to squeeze that down. But equally it’s about making a much better experience and saving time for businesses, that’s really important.

Gender pay gap reporting has been a big topic in recent weeks. The Treasury’s median pay gap stands at 13.7% – were you surprised by that and are there any plans in place to improve opportunities for women?

Firstly, it’s so important to this government’s mission to ensure there’s a basic point of fairness, that whether you’re a man or a woman you are treated equally and fairly. It has been illegal in this country for decades now to discriminate against women for example, in terms of you can get the same jobs as men and you get the same amount of money for it.

What this exercise is about is shining a light on organisations and saying within those organisations, given that you’ve already got to have the same pay for the same work, who’s earning the most and who’s earning the least and why is one group earning more or less than the other. There may be some perfectly explainable reasons for that, but there may not. What I hope is that this greater transparency leads to more opportunities for women.

So for example they say most airline pilots happen to be men. That could be that more men want to be airline pilots, or it could be that these airlines are not doing enough to encourage women and show women that there is an opportunity there. So I hope it’ll move in that kind of direction– of opening up opportunities and making companies think a bit more about whether they’re using women to their full potential.

Of course, there are some companies where women earn more than men. Not a massive number, but there are some, and there’ll be reasons for that too. So I think it gives us some data that’s useful but it needs to be interpreted.

The Spring Statement focused heavily on productivity. Although forecasts for growth in 2018 have been revised up based on 2017 performance, forecasts for 2021 and 2022 were revised down. Are you optimistic that performance will exceed the forecasts?

Forecasts are forecasts. So one thing you can almost be certain of with forecasts is that they won’t be exactly right. But the OBR have said what they’ve said, which is a slight uptick in 2018 and a little bit less further on. I’m just feeling increasingly optimistic about what’s happening with the economy at the moment.

There was a feeling post-Brexit – and I was a Remainer – that it was all going to fall apart, and I think there was a big shock and I think that did have an impact. But I think that has settled down and I think we are now beginning to see all the real wage stuff and the additional confidence that I think businesses are getting now that the implementation period is in place, which I think will free up some of the investment that was being held back. The very good jobs numbers data that we’ve just had, the low levels of unemployment and all that stuff. I just have a feeling that we’re on the right track and at a bit of a turning point.

Lastly, obviously you’re a very busy man. What currently keeps you up at night?

That’s a very good question! I think the answer has to be still my youngest daughter, she has a habit of coming down and climbing over us and getting into our bed on too regular a basis. She came in this morning and you end up with just a strip of the bed. Lovely as it is, it does keep you up!

Interview by Alia Shoaib, junior editor,  Accountancy Age

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