New UK Digital Services Tax to Apply From April 2020

July 12, 2019

On July 11, 2019, the UK government confirmed that a new digital services tax (DST) will be introduced in the UK and published draft legislation for the Finance Bill 2020.

What is the new tax?

From April 2020, a new 2% DST will be applied on the revenues of search engines, social media platforms, and online marketplaces (including the carrying on of any associated online advertising business) which derive value from UK users.

When will businesses be liable?

Businesses will be liable to DST if:

  • The group’s worldwide revenues from in-scope activities are more than £500 million; and
  • More than £25 million of those revenues are derived from UK users.

The scope includes any revenue which is connected to the business activity, regardless of how the business monetises the platform. For revenues attributable to both in-scope and out-of-scope activities, businesses will need to apportion on a ‘just and reasonable’ basis. There is an allowance for the first £25 million of revenue derived from UK users.

When will revenue be from a “UK user”?

In most cases, revenue is treated as derived from UK users if it arises by virtue of a UK user using the relevant platform. Advertising revenue is treated as derived from UK users when the advertisement is intended to be viewed by a UK user.

Are there exemptions?

  • An exemption from the online marketplace definition will apply for financial and payment services providers.
  • A “safe harbour” provision will allow businesses to make an alternative calculation of DST. This is intended to ensure that the tax doesn’t have a disproportionate effect on business sustainability where a business has a low operating margin from providing in-scope activities to UK users.

How will it work in practice?

Total DST liability will be calculated at the group level but charged on the entities that realise the relevant revenues. This means that revenues can count towards the thresholds even if recognised in entities that have no UK taxable presence for corporation tax purposes.

For more on the proposed DST, please see our Alert Memo here, or reach out to your regular firm contact.