UK government confirms digital services tax charge from next month

Setting the rate

The new tax move has been a long time coming following anger that the world’s largest companies don’t pay enough on the large profits they make in the UK, but it is still pretty much small fry to them.

The UK HMRC tax office has confirmed the government’s plan to introduce a Digital Services Tax next month on all UK and foreign companies, despite opposition from the US government and threats of retaliation against UK companies.

From 1 April 2020, the government will introduce a new 2% tax on the revenues of search engines, social media services and online marketplaces which derive value from UK users. The tax will hit the likes of Facebook, Google, Amazon, Microsoft and eBay, all US companies.

“The application of the current corporate tax rules to businesses operating in the digital economy has led to a misalignment between the place where profits are taxed and the place where value is created,” said HMRC.

Under the current international tax framework, the value businesses derive from national customer bases – like the UK’s – is not taken into account when allocating the profits of business between different countries, said HMRC. “This measure will ensure the large multinational businesses in-scope make a fair contribution to supporting vital public services (in the UK).”

The government, says HMRC, still believes the most sustainable long-term solution to the tax challenges arising from digitalisation is reform of the international corporate tax rules and “strongly supports G7, G20 and OECD discussions on long-term reform”. The government says it is committed to “dis-applying” the Digital Services Tax once an “appropriate” international solution is in place.

The Digital Services Tax will apply to revenue earned from 1 April 2020.

Firms liable to Digital Services Tax are those with group worldwide revenues from the digital activities covered of more than £500m, and if over £25m of it is derived from UK users.

If the group’s revenues exceed these thresholds, its revenues derived from UK users will be taxed at a rate of 2%.

There is an allowance of £25m, which means a group’s first £25m of revenues derived from UK users will not be subject to Digital Services Tax.

Where one of the parties to a transaction on an online marketplace is a UK user, all of the revenues from that particular transaction will be treated as derived from UK users.

The tax charged will be reduced to 50% of the revenues from any transactions when a user in respect of a marketplace transaction is normally located in a country that operates a similar tax to the Digital Services Tax. France, for instance, has a similar digital services tax charged at 3%.

The UK government expects to raise around £280m in the next financial year (2020/21) from the tax, which is expected to rise to £515m in tax year 2024/25.

These figures are relatively peanuts in terms of what the big global digital companies make as a collective, but the government will make political hay from the move as it attempts to cool down discontent among the natives, angry at the proportion of basic tax they pay on their profits compared to the largest companies in the world.

The move won’t fill much of a hole in the £600bn the UK government intends to spend on infrastructure investment over the next few years either, as detailed in this week’s national annual budget.