Budget 2020 – Chancellor Sunak Ignores Trumps Threats and Introduces the Digital Services Tax

Wed 11 Mar 2020

In a move that could attract the ire of President Trump, UK Chancellor of the Exchequer, Rishi Sunak, confirmed that the UK will enact the Digital Services Tax (“DST”) legislation with effect from 1st April 2020.

It had been mooted that the UK might postpone or withdraw this measure in order to smooth negotiations between the USA and UK ahead of the UK’s exit from the European Union.

The DST applies to large-multinational technology companies with global revenues exceeding £500 million, of which, more than £25 million is derived from UK users from in-scope activities. Notably, it will apply whether a group has a UK taxable presence or not. A ‘UK user’ is an individual that is normally located in the UK, or other type of user established in the UK. In-scope activities includes:

• The provision of social media platform (including micro-blogging websites, online dating sites and video / image sharing platforms);
• The provision of a search engine; and
• The provision of an online marketplace.

It is important to note that financial and payment service providers could be exempted from being considered an online marketplace for DST purposes should they meet certain criteria.

A group’s first £25 million of taxable revenues derived from UK users will not be subject to 2% Digital Services Tax. Taxable revenues include any revenue earned by the group (derived from UK users) 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 in-scope activity and another activity, it will need to be apportioned on a just and reasonable basis. Taxable 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.

Companies which exceed the thresholds must notify HMRC that they are within the scope of DST by 90 days following the end of the relevant accounting period.

DST is payable 9 months after the end of the relevant accounting period. The tax is deductible against any charge to corporation tax, but not creditable against other UK taxes. 

A DST return must be filed within 12 months of the end of the accounting period. A group can nominate a company to file a return (otherwise the burden will fall on the parent of the group) and pay the tax, although each company that was a member of the group is liable for this tax.

Owing to the complexity and administrative burden of the proposed rules, it is important that technology companies who qualify for DST are adequately prepared. Additionally, DST could potentially apply to companies that are not strictly considered a technology company, therefore, it is important that all large multinational groups are aware of the legislation.

For more information on this please contact TMT Tax Senior Manager, Jim McDevitt at jim.mcdevitt@mazars.co.uk