Digital Services Tax – the facts and what it means for digital businesses
The Finance Bill 2020 published on 19 March 2020 includes the final provisions of the UK’s Digital Services Tax (“DST”). The Government also published Explanatory Notes alongside the Bill as well as a Manual which provides further detail on the DST.
The New Digital Tax
Digital Services Tax is a new tax on the revenues of large digital businesses to ensure that the amount of tax paid in the UK is reflective of the value derived from UK users.
The Government has confirmed that it is committed to repealing the tax once satisfactory multilateral measures are implemented through the OECD’s work on the digitalisation of the economy although the legislation does not contain any provisions linked to this commitment.
The Bill broadly follows the draft legislation published last year.
As a reminder the main points to note in respect of these new rules are:
- There will be a 2% tax levied on UK digital services revenues arising in connection with certain types of digital activity that are attributable to UK users;
- The rules commence on 1 April 2020;
- The in-scope digital services activities are:
- Social media services;
- Internet search engines; and
- Online marketplaces.
- If an activity is ancillary or incidental to an in-scope digital services activity, its revenues may also be subject to the DST.
- A group will be liable to the DST when:
Its annual worldwide revenues arising from relevant digital services activity exceed £500 million; and More than £25 million of these annual digital services revenues are attributable to UK users.
- The due date of the tax is the day after nine months following the end of the accounting period. For example, a company subject to DST with an accounting period that ends on 31 December 2020 will make its first payment of DST on 1 October 2021.
The Bill provides some useful clarifications around scope, particularly on what may be considered to not fall within scope of certain definitions. For example, for the purpose of determining in-scope search engine revenues, a facility that only searches material on a single website is not itself considered to be a ‘search engine’ which is a welcome clarification for businesses, including certain e-tailers.
The phrase ‘social media platform’ in the draft legislation has been replaced with ‘social media service’ and requires that “making content generated by users available to other users” is a ‘significant’ feature of the service .
One of the main amendments from the draft legislation was a change to the proposed exemption for financial services providers. Previously a ‘financial services provider’ in this context was specifically defined and linked to regulatory approvals.
This definition is now removed and the Bill states that the exclusion applies to a marketplace that, for the time being, derives more than half of the relevant revenues from the facilitation of the trade of financial instruments, commodities or foreign exchange.
Chris Denning, Head of International Tax commented,
“Notwithstanding that the introduction of DST was trailed for some time beforehand, it was conspicuous in not being mentioned during the UK Chancellor’s budget speech and against the backdrop of the coronavirus crisis, now has the feeling of being introduced, at least publicly, somewhat under the radar.
There are no doubt interesting discussions going on behind the scenes between the UK and US treasuries”.