Digital Services Tax: What is it? What will it mean for the UK Tech Industry?

30 October, 2018

The Chancellor, Philip Hammond, has announced that the Government will introduce a digital services tax (DST) in April 2020.

 

The DST is intended to target “established tech giants” with a tax of 2% on their UK revenue, to reflect the value they derive from the participation of UK users of their technology. The levy will apply to social media platforms, internet marketplaces and search engines but Mr Hammond said that the DST would only be imposed on companies that are profitable and generate “at least £500m a year in global revenue”.

 

Although not named in the budget, US companies Amazon, Google and Facebook have been criticised for the relatively small amount of tax they pay in the UK and further afield. Both the European Commission and the intergovernmental Organisation for Economic Co-operation and Development (OECD) have been considering the introduction of a global tax policy on digital services but, in the words of the Chancellor, progress has been “painfully slow”.

 

In March 2018, the OECD published an interim report on the tax challenges arising from digitalisation, but it did not make any recommendations due to a lack of consensus between the 36 member countries on whether a tax response is necessary and how it could be implemented.

 

The Chancellor said that the UK remained committed to working with the OECD on an international solution and would schedule a formal review the DST in 2025 “to ensure it is still required following further international discussions”.

 

In its briefing paper the Government said that the DST would be narrowly-targeted and would include a number of features intended to provide protection for small businesses including:

  • a “double threshold”, whereby only businesses which generate revenue of at least £500m globally would be targeted and the first £25m of relevant UK revenues would not be taxable
  • a “safe harbour” giving businesses with very low profit margins the opportunity to elect to calculate their liability on an alternative basis

 

It also stated that financial and payment services, the provision of online content, sales of software/hardware and television/broadcasting services would not be in scope of the DST.

 

The Treasury forecasts that the DST will generate £275m in 2019-20, rising to £370m in 2020-21 and £400m in 2021-22. However, the Office for Budget Responsibility has forecast that Google and other tech giants could pay as little as £30m more each year and considered the Chancellor’s £400m estimates as “subject to high uncertainty”.

 

The Government has said that it will soon be issuing a consultation on the design of the DST to explore the “key questions and challenges” concerning the application of the DST and to ensure it operates as intended and that it “does not place unreasonable burdens on businesses”.

 

Until the consultation is complete and full details of how the DST will be implemented have been published, it is difficult to assess the full impact on the UK tech industry. However, the DST has already received opposition from some commentators in the tech industry. Julian David, CEO of techUK, has said that he is “opposed to any tax that seeks to narrowly target businesses simply because they are digital” and warned that “this approach risks undermining the UK’s reputation as the best place to start a tech business or to invest” and Russ Shaw of Tech London Advocates said on Twitter that “Tackling the digital tax question without coordinating efforts with the U.S. and EU as key global partners…will only further entrench Britain in an isolationist position we cannot afford.”

 

For updates from us and the latest Tech news follow us on Twitter @CrippsTechLaw