The UK Government will introduce a new Digital Services Tax (DST) for large digital businesses.
This new tax will apply to relevant revenues received in accounting periods ending on or after 1 April 2020. It will be a narrowly targeted 2% tax on UK revenues of global companies providing digital services that derive significant value from the participation of their users. DST is seen as a temporary measure pending the outcome of ongoing discussions with the EU, OECD and G20 to reach an agreement on a global digital tax system and is subject to a formal review in 2025.
A consultation document was published by HMRC and HM Treasury on 7 November 2018 and invites relevant affected entities and advisers to respond by 28 February 2019, so that the legislation when drafted will be as effective as possible. To ensure that your insights and concerns on the new tax are considered by HMRC, we would recommend responding to the consultation document. If this is of interest to you please get in touch and we can support you with your submission.
- A business will only be affected by this tax if it generates more than £500 million inglobal annual revenues from in-scope business activities and it generates more than £25million in annual revenues from in-scope business activities linked to the participation of UK users.
- In-scope business activities are those delivered through a website or alternative internetbased application eg. a mobile application, and either include (i) the provision of asearch engine not limited to a business’s own material; (ii) a social media platformwhere user interaction is more than ancillary or incidental; or (iii) an online marketplacewhere the business does not take legal ownership of goods.
- Out of scope business activities include the provision of financial and payment services,provision of online content (eg. television or music subscription services, onlinenewspapers etc.) and the sales of own goods online either through a seller’s own websiteor through a marketplace. The provision of radio and television broadcasting services willalso not be caught.
- DST will only apply to revenues earned from intermediating sales, not from the underlying sale itself, and only where value is derived from UK users, e.g. revenues that a supermarket generates from collecting information on customers via a loyalty card scheme will not be caught.
- An alternative ‘safe harbour’ DST calculation will be available to ensure that DST remains proportionate for businesses with a very low profit margin.
- Businesses will not have to pay tax on the first £25 million of qualifying revenues received by a group. DST will be deductible against UK corporation tax under existing principles and qualifying revenues chargeable to DST will be declared net of VAT.
- From an international perspective, DST is seen as non-discriminatory and will not be within the scope of the UK’s double tax treaties.
Practical questions arising for taxpayers
What is a UK user and how is this linked to UK revenues?
A user can be an individual, company or any other legal person. A UK user should be normally resident in the UK and primarily located in the UK when participating in the relevant business activity, (or considered so, on a just and reasonable basis, where the UK user is travelling across borders). Only revenues that arise through the engagement and participation of a UK user base will treated as UK revenues for DST purposes. For online advertising, UK revenues will comprise the revenue derived from adverts displayed at UK users. For other mediums, such as subscriptions, commissions etc., UK revenues will be those payments that come from a UK user or relate to a transaction involving at least one UK user.
How do you calculate a DST liability?
A business will first have to decide whether its activities fall within the definition of in-scope activities. Second, the business will have to asses which functions they perform meet the definitions of these activities, such as the functions within social media platforms which allow users to interact with other users, or publish / share personal details. Then, the business will have to identify the quantum of revenues generated from those functions and finally strip out revenues which are not linked to the participation of a UK user. The DST liability is then calculated as 2% of this amount, subject to the safe-harbour alternative calculation.
How will DST be reported?
It is proposed that the administrative, reporting and compliance framework for DST will be aligned with the existing corporation tax framework. Therefore, each company in a group will have to determine the amount of taxable revenues it receives and notify HMRC within 3 months of the start of the relevant accounting period. This is irrespective of whether the company is UK resident or has a UK permanent establishment.
DST will be paid quarterly in line with Very Large Corporate Quarterly Instalment Payments.
Two new anti-avoidance rules will be introduced to prevent the acceleration of revenue recognition before April 2020 and the artificial re-characterisation of revenue streams. In addition, all entities within a business will be jointly and severally liable for the DST liability of the business’s members. A new penalty regime will also be introduced.
Please note that the above information is based upon communications from HMRC and HM Treasury and is not UK law. Information included in this note may change when draft and final legislation is published.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.