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The Budget 2018: Digital Services Tax

The Budget 2018: Digital Services Tax

  • United Kingdom
  • Tax planning and consultancy - Budget

30-10-2018

The Chancellor has announced plans to introduce a Digital Services Tax (“DST”) from April 2020. It is anticipated that the DST will raise £400m annually.

While the Chancellor noted that the long term solution to taxing the digital economy would require reform of the global tax system, he lamented that progress towards such reform was “painfully slow”. As a result, he said that the government has decided to act now and introduce a DST until the point at which an appropriate international solution was found.

The DST will apply a 2% tax on the revenues of specific digital business models where their revenues are linked to the participation of UK users. The tax will apply to search engines, social media platforms and online marketplaces. Financial and payment services, the provision of online content, sales of software/hardware and television/broadcasting services will not be within the scope of the DST. The government will be consulting on whether any further exemptions should be made.

The Chancellor was keen to stress that 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. The DST is also not a generalised tax on online advertising or the collection of data.

Therefore, in order to be in scope, what matters is:

i) the company’s business model (in scope business models would be search engines, social media platforms and online marketplaces); and

ii) the location of the user of such business models (i.e. business models which are linked to UK users).

However, the Chancellor was clear that the DST is intended to be targeted at “tech giants” rather than start-up companies. The DST will only apply to businesses which generate revenues from in-scope business models of at least £500m globally. Furthermore, the first £25m of relevant UK revenues will not be taxable. This means that small businesses will be outside the scope of the tax.

In addition, a safe harbour is to be introduced which will mean that businesses can elect to calculate their liability on an alternative basis. This is intended to mean 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. The government will be consulting on the precise design of the safe harbour which is intended to ensure that the DST is proportionate.

The DST is also only intended to be a temporary measure, pending a comprehensive global solution. The DST will be subject to formal review in 2025 to ensure it is still required following further international discussions. In addition, the government will disapply the DST if an appropriate solution is in place prior to 2025. The Chancellor stated his commitment to continuing dialogue with the EU, G20 and OECD in order to seek a global solution to the international digital tax framework.

Corporate tax partner Ben Jones commented that although the introduction of a DST meant that the UK was ahead of the game in the taxation of the digital economy, such a unilateral measure could risk isolating key trading partners such as the US – something which the UK cannot afford to do in the wake of Brexit uncertainty.

For further information on the DST, please contact Ben Jones.

Please view our dedicated Budget 2018 hub here. It will give you access to our watch list, our contributors and relevant articles and tweets.

www.eversheds-sutherland.com/thebudget

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