From 1 April 2020, the government will introduce a new 2% tax on the revenues of search engines, social media services 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. Many of these digital businesses derive value from their interaction and engagement with a user base.
Under the current international tax framework, the value businesses derive from user participation is not taken into account when allocating the profits of business between different countries. This measure will ensure the large multinational businesses in-scope 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 long-term reform. The government is committed to dis-applying the Digital Services Tax once an appropriate international solution is in place.
The announcement of the Digital Services Tax in Budget 2018 was followed by a consultation which closed in February 2019. Draft legislation was published in July 2019 followed by a consultation which closed in September 2019.
The Digital Services Tax will apply to revenue earned from 1 April 2020.
Legislation will be introduced to establish a Digital Services Tax.
The Digital Services Tax will apply to a group’s businesses that provide a social media service, 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 £500 million and more than £25 million 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 £25 million, which means a group’s first £25 million of revenues derived from UK users will not be subject to Digital Services Tax.
The provision of a social media service, internet search engine or online marketplace by a group includes the carrying on of any associated online advertising service. An associated online advertising service is an online service that facilitates online advertising and derives significant benefit from its association with the social media service, search engine or online marketplace.
There is an exemption from the online marketplace definition for financial services providers.
The taxable revenues will include any revenue earned by the group which is connected to the social media service, search engine or online marketplace, irrespective of how the business monetises the service. If revenues are attributable to the business activity and another activity, the group will need to apportion the revenue to each activity on a just and reasonable basis.
Revenues are usually derived from UK users if the revenue arises by virtue of a UK user using the service. However, there are some exceptions to this general rule.
Where one of the parties to a transaction on an online marketplace is a UK user, all of the revenues from that particular transaction will be treated as derived from UK users.
When the transaction involves accommodation, land or buildings in the UK, revenue from that transaction will be treated as derived from UK users. When the transaction involves accommodation, land or buildings not in the UK, revenue from that transaction will only be treated as derived from UK users if the consumer of the relevant service is a UK user.
The revenue charged will be reduced to 50% of the revenues from the transaction when a user in respect of a marketplace transaction is normally located in a country that operates a similar tax to the Digital Services Tax.
Advertising revenues are derived from UK users when the advertisement is viewed or otherwise consumed by a UK user.
A UK user is an individual that is normally located in the UK, or other type of user established in the UK.
Groups will be able to elect to calculate their Digital Services Tax under an alternative calculation. This is intended to ensure that the Digital Services 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 Digital Services Tax will be charged on the individual entities in the group that realise the revenues that contribute to the 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 Digital Services Tax 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.
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.
As with any new tax, there will inevitably be an increased admin burden on the affected groups. The customer experience for the businesses in scope of the Digital Services Tax will change due to the additional requirements placed on them from complying with a new tax. HMRC will provide clear and targeted guidance to support businesses further.
One-off costs will include familiarisation with the new rules. Ongoing costs may include keeping records of revenue referable to UK users and making payment to HMRC. Businesses in scope will also use a new service to make their annual return of the tax due.
This measure is not expected to impact on civil society organisations.