UK Digital Service Tax

Overview

Following the original announcement in the 2018 UK Budget, the introduction of a similar tax in France and despite ongoing pressure from the US, the UK is pressing ahead with its Digital Services Tax (DST) from April 1, 2020.

Given the current political position in the UK, it is possible that there could be a delay in implementing this measure. However, it is prudent for those businesses affected to be preparing for this new tax. 

The UK Government has calculated that DST could raise approximately GBP1.5 bn over the four years following its introduction.

Company conditions and threshold value

DST is an annual 2% levy on revenues generated by social media platforms, search engines and online marketplaces derived from UK users. Businesses with mixed activities will need to identify revenue that falls within and outside the scope of DST.

DST would apply to businesses or groups that:

• generate greater than GBP500 million in global revenues from in-scope activities; and
• have revenues from in-scope activities that are linked to the participation of UK users of more than GBP 25 million

Financial and payment service providers will be exempt from the definition of an online market place and will therefore fall outside the scope of the tax. Setting the threshold at such a level is intended to ensure the large multinational groups in this arena, such as Google or Facebook, are caught by the new tax while not negatively impacting smaller providers. In addition, the first GBP 25 m of a group’s revenues derived from UK users will not be subject to DST.

Finally, the intention is to introduce a “Safe Harbour” which would allow businesses with very low profit margins to make an alternative calculation of DST. This alternative calculation should ensure the DST cannot create a loss for the business.

The challenges

While for some businesses it may be easy to identify revenue that is within the scope of the tax, for others this will represent a challenge. Therefore, changes to systems and processes may be necessary.

Whether revenue derives from UK users will depend on the type of digital services provided. For example, advertising revenues will be deemed to have been derived from the UK when the advertising is intended to be viewed by a UK user, whereas most other services will be UK-derived where a UK user uses the platform. Revenues arising from an online platform in connection with the sale or provision of UK accommodation/real estate is also expected to be UK revenue for the purposes of DST (e.g., Airbnb).

In addition, the UK authorities have suggested that the revenue will be treated as within the scope of DST where there are any UK users. This will be the case where there are multiple users for one transaction and only one of them is a UK user. This could lead to an unfair allocation of revenue to the UK and its application will need to be considered carefully once the final legislation and guidance are published.

The current double tax treaties will not recognise DST, suggesting that multinational digital companies cannot offset relief against corporate income tax payable in their home country. Furthermore, there are potential risks that DST would overlap with other UK and non-UK taxes.

The future of DST

As with all DSTs, either implemented or proposed, the intention is for it to be a temporary measure to address issues the OECD has been considering with regard to the digital economy. Once a global agreement is reached on taxation in the digital arena, the expectation is that DST will be revoked.