July 15, 2019

A new Digital Services Tax was announced in Budget 2018 and was followed by a consultation, which closed in February 2019.

Together with the policy paper, the Government has also published draft legislation and explanatory notes.

The policy paper states that large multinational enterprises with revenue derived from the provision of a social media platform, a search engine or an online marketplace to UK users will be affected. These businesses will be liable to Digital Services Tax when the group’s worldwide revenues from their digital activities are more than £500 million and more than £25 million of these revenues are derived from UK users. From April 2020, these businesses will be liable to pay 2% tax on these UK revenues.

The Government says that the objective behind the new tax is to resolve the current misalignment in the digital economy between the place where profits are taxed and the place where value is created. Many digital businesses derive value from their interaction and engagement with a user base, which is not taken into account under the current international tax framework when allocating the profits of a business between different countries. The Government says that the new 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 it strongly supports G7, G20 and OECD discussions on the different proposals for reform. The Government says that it is committed to disapplying the Digital Services Tax once an appropriate international solution is in place.

The Digital Services Tax will apply to revenue earned from 1 April 2020. Legislation will be introduced in the Finance Bill 2019-20. To access the policy paper and associated documents, click here.