On UK Budget day: 29 Oct 2018, the UK Government announced that it will unilaterally introduce a 2% digital services tax on the revenues of large digital firms that are linked to users in the UK (whilst continuing to contribute to global consensus on a long term answer to this challenge to the UK tax system).
The tax is built around revenues that arise from UK users, for the reasons covered in its previous statements published at Autumn Budget 2017, and Spring Statement 2018.
How will the tax work?
- The DST applies a 2% tax on the revenues of specific digital business models where their revenues are linked the participation of UK users. The tax will apply to: search engines; social media platforms; and online marketplaces. That is because the government considers these business models derive significant value from the participation of their users.
- The DST is not a tax on online sales of goods – as a result it will only apply to revenues earnt from intermediating such sales, not from making the online sale.
- It is also not a generalised tax on online advertising or the collection of data. Businesses will only be taxed on the revenues derived from these services to the extent they are performing one of the in-scope business models, which are the provision of a search engine, social media platform or online marketplace.
- The DST will apply to revenues linked to UK users, that are attributable to in-scope business models. This means that, for the purposes of the DST, what matters is the location of the user, not the business. For example:
- if a social media platform [eg. instagram or facebook] generates revenues from targeting advertisements at UK users, the government will apply a 2% tax to those revenues
- if an on-line marketplace [eg. airbnb or Uber] generates commission by facilitating a transaction between UK users, the government will apply a 2% tax to those revenues
- if a search engine [eg. Chrome, Firefox, Safari] generates revenues from displaying advertising against the result of key search terms inputted by UK users, the government will apply a 2% tax to those revenues
- The DST will be narrowly focussed – by including the following features:
- A double threshold – this means businesses will need to generate global revenues from in-scope business models of at least £500m, to become taxable under the DST. The first £25m of relevant UK revenues are also not taxable. This means that small businesses will not be in scope of the tax.
- A safe harbour – this means that businesses can elect to calculate their liability on alternative basis, which will be of benefit to those with very low profit margins. The outcome is that those making losses under this calculation will not have to pay the DST and those with very low profit margins will pay a reduced rate of tax. The government will be consulting on the precise design of the safe harbour which is intended to ensure the DST is proportionate.
- A review clause – this means that the DST will be subject to formal review in 2025 to ensure it is still required following further international discussions. This underlines the government’scommitment to continue seeking a global solution to ultimately replace the DST. In addition, the government will dis-apply the DST if an appropriate international solution is in place prior to 2025.
- The DST will be an allowable expense for UK Corporate Tax purposes under ordinary principles. However, given the DST will not be within the scope of the UK’s double tax treaties, it will not be creditable against UK Corporate Tax.
- Financial and payment services, the provision of online content, sales of software/hardware and television/broadcasting services will not be in scope of the DST. The government will explore with stakeholders during the consultation whether further exemptions should be made.
[Gov.UK – UK Budget Speech; UK Treasury – DST Summary Paper, DST Consultation Paper; LTN 209, 30/10/18; Tax Month – November 2018]
FJM 11.11.18
CPD questions (answers available)
- Has the UK announced a unilateral DST (without waiting for the G20, EU or OECD to come to a consensus on how to tax this type of income)?
- Has the UK abdicated its role in advocating an international approach?
- Will the DST be imposed on revenues from advertisements targeting UK users on ‘social media’ platforms?
- Will the DST be imposed on revenues from on ‘online markets’ by facilitating transactions between UK customers?
- Will the DST be imposed on revenues from ‘search engines’ on terms inputted by UK users?
- Will the DST be imposed on the online supply of goods?
- Will the DST be a general tax on online advertising?
- What is the global turnover threshold for taxpayers subject to the DST?
- Is the threshold applied to all turnover?
- What feature of the DST protects ‘small business’?
- Will the DST be an expense (deductible) for UK income tax?
- Will the DST be creditable under the UK’s double tax treaties?
