A planned tax on digital businesses should be canned because it risks making Britain look unfavourable to innovative technology firms, the Confederation for British Industry (CBI) has warned.

The industry body is calling for Philip Hammond’s digital services tax, which would impose a two per cent levy on revenues from April 2020, to be scrapped in favour of an international effort led by the OECD to tax digital and tech giants such as Google and Facebook.

In October, the chancellor said international efforts to co-ordinate on digital taxes were taking too long and announced the UK would forge ahead with plans for a tax on tech firms with global revenues over £500 million in a bid to raise £400 million a year. The OECD is aiming to thrash out an international consensus on taxation of digital multinationals by the end of next year.

However, in comments made to the Daily Telegraph newspaper, Rain Newton-Smith, the CBI’s chief economist, said there was a risk the charge is passed on to smaller businesses which are less capable of shouldering additional tax burden.

“A two per cent tax doesn’t sound like a lot but in a high volume, low margin business it could wipe out your profits – when it comes to [small businesses], adding to their cost base is not welcome,” she said, warning that a move to clampdown on digital companies risks “sending the wrong message” when the UK is in danger of isolating itself on the international scene and could deter businesses from investing in the digital technology in this country.

It could also harm the growth of digital industries in the UK at a time when the government is basing its industrial strategy on the digital economy, Newton-Smith said.

As a result, she urged the UK to follow the likes of Australia in halting unilateral plans to introduce a levy, and wait instead to adopt the internationally agreed OECD measures.

Announcing the plan in October, Hammond said: “This will be a narrowly targeted tax of UK revenues of specific business models, designed for established technology giants rather than startups to shoulder the burden.”

Hammond also emphasised that the new tax would not be applied to online sales of goods and services, as this would be unfairly passed on to the consumer, but to the turnover made on these sales from UK customers.

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