A Digital Sales Tax is coming!

Mon 29 Oct 2018

Having repeatedly made clear his intention for the UK to take a lead on a ‘digital tax’, the Chancellor has today announced that the UK will unilaterally introduce a 2% UK digital services tax on the revenues of certain digital businesses from April 2020.

The Chancellor has his sights set on the global tech giants. He has proposed targeted rules applying only to organisations with global turnover in excess of £500m on ‘in scope’ business lines and focusing on those digital platform businesses with a ‘profitable business in the UK’.

The tax will apply to revenues generated from search engines, social media platforms and on-line market places, linked to the participation of UK users, subject to a £25m annual allowance. There will be exemptions for loss making businesses and a reduced rate of tax on businesses with very low profit margins.

This will be on top of the new income tax on offshore receipts from UK sales in respect of the exploitation of intangible property which applies from 6 April 2019. The income tax measure does not have a global revenue threshold like the digital sales tax, though there may be a credit for the digital sales tax when calculating the income tax due.

The devil will be in the detail, and it will be fascinating to see how the Chancellor addresses the implementation of a local tax on business that are, by their very nature, international, and precisely how UK users are identified. Affected businesses will want to reconsider the business models in which jurisdictions costs are recognised, and whether their transfer pricing policies will be affected. Even at this early stage, it’s clear that coordination with the international tax community will be critical. The Chancellor will want to avoid the UK being the only country with any such tax for a number of years, impacting on attractiveness for overseas business and in all likelihood passing the costs onto consumers in some way. A consultation on the digital sales tax is to follow and given ongoing uncertainty around Brexit, international businesses will be keen for clarity as soon as possible.

The Chancellor has previously commented on the challenge of ‘going it alone’ in shaping a tax system fit the modern economy, but is committed to the UK being at the forefront of those developments.

We look forward to the consultation process in this fast moving area of tax.