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UK Digital Services Tax – Draft legislation announced for April 2020 implementation

  • United Kingdom
  • Tax planning and consultancy


On 11 July 2019, the UK Government published draft legislation for a proposed UK Digital Services Tax (the “DST”). It is planned that this DST will come into force from 1 April 2020.

Set out below is a detailed summary of the proposed DST based upon the draft legislation and accompanying guidance. This draft legislation remains subject to further consultation and any businesses potentially impacted by these DST proposals may want to consider contributing to this consultation process to address any lack of clarity or unanticipated outcomes arising from the draft legislation.

Executive summary

From 1 April 2020, the UK intends to apply a 2% tax on the revenues (not profits) derived from specific digital business models where such revenues are attributable to UK users.

The key features of the proposed tax are as follows:

• The DST will apply to revenues attributable to social media platforms, search engines and online marketplaces.

• The DST will also apply to revenues arising from an associated online advertising business that derives significant benefit from its connection with the above activities.

• The DST will only apply where the following financial thresholds are met by a relevant group in an accounting period:

o worldwide revenues attributable to DST activities exceed £500m

o revenues attributable to DST activities which are attributable to UK users exceed £25m

• Even where the above thresholds are met, DST will not be payable on the first £25 million of relevant UK DST revenues.

• There are no prescribed rules for determining whether DST revenues are attributable to UK users, placing the burden on business to take reasonable steps to identify UK users and allocate appropriate revenue.

• The DST will include safe harbour provisions pursuant to which businesses with very low profit margins or making a loss will pay a reduced (or zero) amount of DST.

• DST revenues can be reduced in certain situations where a non-UK DST similar to the UK DST may apply to the same transaction.

• DST will be payable on an annual basis.

• The DST should be deductible against UK corporation tax under existing principles.

The proposed UK DST

The proposed UK DST will apply to groups that meet the DST activity condition and revenue condition.

The rate of the DST is proposed to be 2% of UK digital services revenues (not profits), subject to an alternative charge provision (described as a safe harbour) designed to avoid unfair consequences for low margin and loss making activities (see further below).

The DST activity condition

Relevant activities for the purposes of the UK DST are the provision of:

• a social media platform

• an internet search engine

• an online marketplace

These relevant activities also include “associated online advertising business” where this business derives significant benefit from its connection with the relevant underlying activity (see below).

The draft guidance gives some further general detail on this condition, explaining that a relevant activity should involve providing a substantive business service to third party customers for a commercial purpose. This further description is intended to make it clear that internal functions and services are excluded (e.g. internal intranets), as are incidental/ancillary activities.

However, the concept is fundamentally widely drafted, as revenues for the purposes of the DST will include revenues attributable or connected to a DST activity, even if the connected activity does not itself satisfy the activity condition.

Meaning of a “social media platform”

A social media platform is defined as an online platform where:

• the main purpose, or one of the main purposes, is to promote interaction between users

• the platform enables content to be shared with other groups of users

The draft guidance gives further details on this definition. For example, it lists useful indicators of the importance of user interaction to the platform (e.g. growing the user base as a KPI, reliance on user generated content, expenditure on understanding user interaction) as well as making it clear that the sharing of content is intended to refer to public sharing – private content sharing and private messaging software is not being targeted by the DST.

Examples of social media platforms include:

• social networking sites

• micro-blogging platforms

• video or image sharing platforms

• online dating websites

• platforms that primarily exist to share user reviews

Meaning of an “internet search engine”

This phrase is not defined in the legislation and the guidance states that it is intended to reflect normal understanding. The guidance does however make it clear that internal search engines are not included in the definition.

Meaning of an “online marketplace”

An online marketplace is defined as:

• an online platform

• the main purpose, or one of the main purposes, is to facilitate the sale by users of particular things

• the platform enables users to advertise and or sell things to other users

Importantly, the guidance makes it clear that this definition is not intended to cover online sales by e-commerce retailers or online sales generally, but only cases where the platform acts as an intermediary or matches users.

Several other points are also clarified:

• it does not matter whether the platform facilitates business or consumer transactions

• the nature of the good or service is irrelevant, and the hiring of goods or services is included

• it is irrelevant whether the transaction is concluded on the platform or seperately

• it does not matter whether the platform acts passively or actively interacts with users, although the main purpose of the platform does have to be the facilitation of sales

Note that online financial marketplaces are specifically excluded from the definition of online marketplaces. An “online financial marketplace” is one provided by a financial services provider where more than half of the relevant revenues arise in connection with the facilitation of the trading or creation of financial assets.

Associated online advertising business

The guidance describes an online advertising business is a business which uses online platforms to facilitate the display of advertising on websites and apps. These businesses generate revenue through auctioning advertising space on third party or related websites, licencing user data or charging fees to third parties wanting to join the advertising network.

If a group has a relevant DST activity, it is also required to assess whether it has an “associated” online advertising business – essentially an online advertising business that derives significant benefit from its connection with the underlying relevant activity. Examples given by the guidance include:

• where the relevant activity provider shares user data with the associated online advertising network

• where the activity provider and advertising network offer the same, integrated or similar services to third parties

• where the development of the advertising network has substantially depended on its association with the relevant activity

The revenue condition

This condition is met when the revenues attributable to the DST activity exceed the revenue thresholds. The revenue thresholds for a group will be met when:

• worldwide revenues attributable to DST activities exceed £500m in the accounting period (“digital services revenues”)

• revenues attributable to DST activities which are attributable to UK users exceed £25m in the accounting period (“UK digital services revenues”)

Digital services revenues

The following are some key points from the guidance:

• revenues are to be identified from the consolidated group accounts providing these are prepared in accordance with acceptable accounting frameworks

• revenues include those connected to a DST activity (i.e. where the revenues would not have been earned without the DST activity or are linked to the DST activity)

• revenues connected with social media platforms will include revenues from:

o displaying advertising to users

o subscription or other access fees from users

o charging users to access specific content

o sale/licensing of user data

• revenues connected with search engines will include revenues from providing/facilitating:

o search advertising on the group’s search engine results

o search advertising shown by the search engine on third-party websites

o other search advertising revenue

o sale/licensing of data

• revenues connected with online marketplaces will include:

o commission fees

o delivery fees

o fees to access or buy/sell goods and services

o fees from advertising products to users (preferential search listings or display advertising)

o general advertising on the marketplace

o subscription fees to access marketplace

• where revenue is received from both DST activities and other activities, it will be necessary to attribute a proportion of such revenue to the DST activities on a just and reasonable basis

UK digital services revenues

The following are some key points from the guidance:

• a user includes both individuals and legal persons

• a UK user is a user who it is reasonable to assume is located or established in the UK

• UK location or establishment could be evidenced by a variety of means:

o delivery address

o payment address

o IP address

o intended destination of advertising based on contractual evidence

o address of property or location of goods rented out

• the guidance states that businesses can only use the evidence available to them to make a determination, but asks businesses to use the test of a reasonably informed and objective observer to assess probable location

• revenues can arise from use by a UK user even where not received from a UK user – the test is whether the revenues would have arisen without the involvement of UK users

In addition to the general points above, there are some specific rules in relation to certain circumstances:

• advertising revenue – this will be attributable to UK users where the advertising is intended to be viewed by UK users (this can be evidence by actual views or by other evidence such as contractual evidence)

• marketplace transactions – all the revenues of a marketplace transaction will be attributable to the UK provided that at least one party to the transaction is a UK user (i.e. there is no apportionment where non-UK users are involved, subject to an exception where the jurisdiction of another user applies a similar DST – see below)

• marketplace transactions involving UK land – where a transaction relates to UK land the revenues from that transaction will be attributable to the UK even if the owner of the land is not a UK user (as above, an exception applies where a user is subject to a similar DST)

Cross-border marketplace transactions

As noted above, in relation to marketplace transactions that involve users from non-UK jurisdictions, if such a user is located in a country that has a DST that is substantially comparable to the UK DST, a claim can be made to subject only 50% of the revenues from the relevant transaction to UK DST.

The DST accounting period and applying the thresholds

The DST is to be assessed over a maximum period of 12 months. The first accounting period will begin on 1 April 2020 and ends on the earlier of the accounting reference date for the consolidated group accounts or 31 March 2021. For accounting periods shorter than 12 months, the relevant thresholds are reduced on a pro-rata basis.

Calculating the DST


Liability is calculated at group level and then allocated to the individual group members that recognise the DST revenues. A £25m de minimis is applied to the group level calculation so the first £25m of a group’s UK DST revenues will not be subject to DST.

The applicable rate of DST is 2% of the group’s total DST revenues less the £25m de minimis.

Alternative charge provision

In order to avoid the DST becoming materially prejudicial to low margin or loss-making digital activities, groups can elect to calculate their DST liability under an alternative calculation. This calculation is intended to prevent the DST charge (otherwise based on revenue) exceeding the profit made by a relevant activity and should prevent loss-making activities being subject to DST.

An election to use the alternative charge provision can only be made annually in relation to each accounting period and is made separately for each DST activity type. It is not however possible to elect separately for sub-sets of the same DST activity.

The legislation and guidance includes details of the calculation and attributable costs.


Responsible member

A single entity (the “responsible member”) of a relevant group will be responsible for dealing with all aspects of administration relating to the DST. By default this will be the group’s ultimate parent unless another eligible group member is nominated to be the responsible member. The responsible member is responsible for the following:

• registration

• calculating the DST liability

• submitting returns

• correspondence with HMRC


The responsible member of a group will be required to register within 90 days of the end of the first accounting period for which the DST revenue condition is met.


The DST is a self-assessment regime. Once a group has registered and begun to file DST returns, it must continue to do so even if the revenue condition is not met in subsequent accounting periods. However, a group in this position can apply for an HMRC direction that returns are no longer required to be submitted.

Liability of other group members

It should be noted that the legislation includes provisions in respect of unpaid DST liabilities pursuant to which, where DST liabilities have not been paid within 3 months of the relevant payment date, HMRC can issue a notice to any other group member demanding payment of such unpaid DST.

Corporation tax deductibility

The guidance states that while there are no specific rules concerning the interaction of DST with corporation tax, it is expected that if a DST expense directly relates to the earning of revenues also subject to corporation tax then such DST expense is likely to have been incurred wholly and exclusively for the purpose of the relevant trade and so be deductible for corporation tax purposes.

Impact on transfer pricing policies

The guidance flags that the DST may need to be considered when determining the transfer pricing of supplies between group members involved in DST activities. Specifically, the question should be asked whether at arm’s length any group company incurring a liability to DST would have passed on this cost component in the pricing of the supplies being made.

Comments and next steps

As with any new tax, although especially with this tax given the fast evolving technology business models that underpin the tax, the draft legislation is like to lead to many questions as businesses seek to understand how it might apply (for example, ascertaining UK users, arguably the core of the new legislation, could well be quite problematic and the legislation and guidance has somewhat ducked some of the issues raised at the earlier consultation stage). The draft legislation is still under consultation and potentially impacted businesses are encouraged to fully engage in this further consultation process to identify issues and seek clarifications or changes.

At a more macro level, the following will no doubt be discussion points:

• US reaction – the timing of the release of this draft legislation, coming as it does at the same time the French Senate approved a French DST (see article here), gives a useful and concerning indication at to the potential US reaction to the UK DST. Similar in form to the French DST, the UK DST burden will inevitably fall proportionately more heavily on US businesses. In reaction to the French DST, the US trade representative Robert Lighthizer has opened an investigation to determine whether France is discriminating against US business. One potential outcome of this investigation could be US tariffs imposed on French goods and services. It is difficult to see why the UK DST would not provoke a similar reaction.

• OECD BEPS Action 1 – although the introduction of a UK DST had been announced at 2019 UK Budget, since its announcement the OECD has been making progress towards a consensus-based long-term solution to taxing the digitalised economy at an international level and hopes to have an agreed proposal by 2020. See articles here and here. In this context, as well taking into account wider issues such as Brexit and current UK diplomatic relationships with the US, it is reasonable to question whether it is sensible to proceed with a UK DST at this point in time.

• sunset clause – one of the issues at the earlier consultation stage is whether the legislation would include a clause that disapplied the DST once a long-term solution to the challenges of the digitalised economy has been agreed and implemented at an international level (pursuant to current OECD initiative discussed above). No such formal sunset clause has been included in the draft legislation, with instead only a commitment from the UK Government in the legislation to undertake a formal review of the DST after five years. This may do little to calm the fears or many that this “temporary” tax could become more permanent.

If you would like to discuss any aspect of the UK DST proposals in further detail, please contact Ben Jones.