The UK Government has introduced a new Digital Services Tax (DST) for large digital businesses.
The DST will apply to relevant revenues received on or after 1 April 2020. It is a narrowly targeted 2% tax on UK revenues of global companies providing digital online services that derive significant value from the participation of their users. DST is 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.
- The DST applies to businesses that generate more than £500 million in global annual revenues from in-scope business activities and more than £25 million in annual revenues from in-scope business activities linked to the participation of UK users. These thresholds are considered on a global groupwide basis.
- In-scope business activities are those delivered through a website or alternative internet based application, such as a mobile application. The activities must also include either (i) the provision of a search engine not limited to a business’s own material; (ii) a social media platform where user interaction is more than ancillary or incidental; or (iii) an online marketplace where the business does not take legal ownership of goods.
- The provision of an online marketplace that sells financial services is specifically excluded from the scope of DST.
- Businesses will not have to pay tax on the first £25 million of qualifying revenues received by a group each year. DST will be deductible against UK corporation tax under existing principles and qualifying revenues chargeable to DST will be declared net of VAT.
- Businesses will be required to register for DST within 90 days of the end of the first accounting period in which the tax is expected to apply.
- An alternative ‘safe harbour’ DST calculation will be available to ensure that DST remains proportionate for businesses with a very low profit margin.
- From an international perspective, DST is seen as non-discriminatory and will not be within the scope of the UK’s double tax treaties.
Frequently Asked Questions
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).
It is important to note that the user’s location is based on their usual location, rather than their location at the time of the transaction which gives rise to relevant revenues.
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.
Who should register for DST?
Your business must register for the DST if it provides a social media platform, search engine, or online marketplace to UK users, and it is anticipated that both the following thresholds will be exceeded by your worldwide group.
- global revenues of more than £500 million in a year; and
- UK revenues of more than £25 million in a year
Can I recover VAT on my costs?
How do you register for DST and when should you do so?
DST applies to accounting periods from 1 April 2020 and you must register within 90 days of the end of the first relevant accounting period. For example, if a business has a year ended 30 June 2020, it must have registered by 30 September 2020.
Registration is completed using the HMRC online service, and requires the Government Gateway user ID and password of the relevant company.
If you are required to register a group, you can elect a responsible member to represent the group, who will then complete the registration process. If a responsible member is not elected by the group, HMRC will automatically identify the ultimate parent company as the responsible member.
How will DST be reported?
The responsible member will be required to submit a DST return to HMRC within 12 months of the end of the first accounting period in which the DST applies and the threshold conditions are exceeded.
Submission is completed using the HMRC online service, and any enquiries into the return will be directed to the responsible member.
The DST return will include the company’s or group’s total digital services tax liability for the period in question, the DST liability for each group company, the allocation of the £25m annual allowance between group companies, and information regarding any reliefs that have been claimed.
DST will be due for payment 9 months and 1 day after the end of the relevant accounting period.
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 that allow users to interact with other users, or publish and share personal details.
Then, the business will have to identify the quantum of revenues generated from those functions and finally strip out revenues that 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 do you account for cross border transactions?
Where a transaction takes place on an online marketplace, the buyer and a seller may not be resident in the same territory. In these scenarios, provided that one of the users is a UK user, the full amount of the revenue generated by the business should be brought into account for DST.
The exception is where the other user is resident in a country that also enforces a DST charge. In such a scenario, a ‘cross border relief’ claim may be made in your DST return, to reduce the UK DST on qualifying transactions by 50%.