Digital Services Tax
One of the more surprising announcements in the recent Budget was the introduction of a new 2% Digital Services Tax (DST) from April 2020. This tax is intended to ensure that the major social media, search engine and online retailers are subject to a 2% tax on revenues generated from the participation of UK users in the use of their services. The DST is expected to raise £1.5 billion from 2020-21 to 2023-24 and to help combat criticism that a number of larger online companies pay little or no tax in the UK. The DST would be payable by profitable companies with global revenues of at least £500 million per year.
The Chancellor stated that:
"Digital Platforms delivering search engines, social media, and online marketplaces have changed our lives, our society, and our economy mostly for the better. But they also pose a real challenge for the sustainability and fairness of our tax system. The rules have simply not kept pace with changing business models. And it’s clearly not sustainable, or fair, that digital platform businesses can generate substantial value in the UK without paying tax here in respect of that business."
The DST will be an allowable expense for UK Corporate Tax purposes under ordinary principles. However, as the DST will not be within the scope of the UK’s double tax treaties, it will not be creditable against UK Corporate Tax.
The Chancellor stressed that the government will continue to work with its partners in the EU, G20 and OECD towards reforming the international corporate tax framework for digital businesses. If an internationally recognised levy was introduced as a result, the UK may introduce this international levy in place of the 2% UK tax.