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Who is likely to be affected
Large multi-national enterprises with revenue derived from the provision of a social media platform, a search engine or an online marketplace (‘in scope activities’) to UK users.
General description of the measure
From April 2020, the government will introduce a new 2% tax on the revenues of search engines, social media platforms and online marketplaces which derive value from UK users.
The application of the current corporate tax rules to businesses operating in the digital economy has led to a misalignment between the place where profits are taxed and the place where value is created. In particular, many of these digital businesses derive value from their interaction and engagement with a user base.
Under the current international tax framework, the value a business derives from user participation is not taken into account when allocating the profits of a business between different countries. This measure will ensure large multinational businesses make a fair contribution to supporting vital public services.
The government still believes the most sustainable long-term solution to the tax challenges arising from digitalisation is reform of the international corporate tax rules and strongly supports G7, G20 and OECD discussions on the different proposals for reform. The government is committed to dis-applying the Digital Services Tax once an appropriate international solution is in place.
Background to the measure
The announcement of the Digital Services Tax in Budget 2018 was followed by a consultation which closed in February 2019.
The Digital Services Tax will apply to revenue earned from 1 April 2020.
This is new legislation and there is no current law in this area.
Legislation will be introduced in Finance Bill 2019-20 to establish a Digital Services Tax.
The Digital Services Tax will apply to businesses that provide a social media platform, search engine or an online marketplace to UK users. These businesses will be liable to Digital Services Tax when the group’s worldwide revenues from these digital activities are more than £500m and more than £25m of these revenues are derived from UK users.
If the group’s revenues exceed these thresholds, its revenues derived from UK users will be taxed at a rate of 2%. There is an allowance of £25m, which means a group’s first £25m of revenues derived from UK users will not be subject to Digital Services Tax.
The provision of a social media platform, internet search engine or online marketplace by a group includes the carrying on of any associated online advertising business. An associated online advertising business is a business operated on an online platform that facilitates the placing of online advertising, and derives significant benefit from its connection with the social media platform, search engine or online marketplace. There is an exemption from the online marketplace definition for financial and payment services providers.
The revenues from the business activity will include any revenue earned by the group which is connected to the business activity, irrespective of how the business monetises the platform. If revenues are attributable to the business activity and another activity, the business will need to apportion the revenue to each activity on a just and reasonable basis.
Revenues are derived from UK users if the revenue arises by virtue of a UK user using the platform. However, advertising revenues are derived from UK users when the advertisement is intended to be viewed by a UK user.
A UK user is a user that is normally located in the UK.
Where one of the parties to a transaction on an online marketplace is a UK user, all the revenues from that transaction will be treated as derived from UK users. This will also be the case when the transaction involves land or buildings in the UK. However, the revenue charged will be reduced to 50% of the revenues from the transaction when the other user in respect of the transaction is normally located in a country that operates a similar tax to the Digital Services Tax.
Businesses will be able to elect to calculate the Digital Services Tax under an alternative calculation under the ‘safe harbour’. This is intended to ensure that the tax does not have a disproportionate effect on business sustainability in cases where a business has a low operating margin from providing in-scope activities to UK users
The total Digital Services Tax liability will be calculated at the group level but the tax will be charged on the individual entities in the group that realise the revenues that contribute to this total. The group consists of all entities which are included in the group consolidated accounts, provided these are prepared under an acceptable accounting standard. Revenues will consequently be counted towards the thresholds even if they are recognised in entities which do not have a UK taxable presence for corporation tax purposes.
A single entity in the group will be responsible for reporting the Digital Services Tax to HMRC. Groups can nominate an entity to fulfil these responsibilities. Otherwise, the ultimate parent of the group will be responsible.
The Digital Services Tax will be payable and reportable on an annual basis.
Summary of impacts
Exchequer impact (£m)
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The impacts of this measure were set out in Table 2.1 of Budget 2018 when the policy was announced. More details can be found in the policy costings document published alongside Budget 2018. Revisions to the impact of the measure in light of changes made here will be subject to scrutiny by the Office for Budget Responsibility and will be set out at Budget 2019.
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
This measure has no direct impact on individuals as it only affects businesses. The measure is not expected to impact on family formation, stability or breakdown.
It is not anticipated that this measure will have any impacts for groups sharing protected characteristics.
Impact on business including civil society organisations
The measure is expected to have an impact on a small number of large multinational groups by bringing into scope of Digital Services Tax the proportion of their revenue that is derived from UK users of social media, search engines or online marketplaces. The policy will be delivered through a Digital Services Tax charge reported and collected under new provisions.
The impact will include one-off costs of familiarisation with the new rules and ongoing costs may include keeping records of revenue referable to UK users and calculating and paying the amount of tax due. Businesses in scope will also use a new service in the future to make their annual return of the tax due.
Guidance will be published by April 2020 to advise of and support these changes.
The overall impact on business is expected to be negligible. This measure is not expected to impact on civil society organisations.
Operational impact (£m) (HMRC or other)
HMRC will incur costs of up to £8 million to enable both new IT systems and processes to be developed as well as additional staff to monitor and administer the new tax.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from receipts.
If you have any questions about this change, please contact the Digital Services Tax team by email: firstname.lastname@example.org.