The UK has proposed an interim digital services tax (DST), to take effect from April 2020. It is a 2% tax on UK revenues derived from social media platforms, search engines or online marketplaces. These categories bring to mind certain big-name multinationals, but the measure could apply more widely.
Note that the 2% – which at first look sounds like a low rate – is applicable to revenue not profit. If you are an entity with high turnover but relatively low profit because you are cost heavy, that does not necessarily get you out of the regime.
A big problem here, both for the UK fiscal authority and for corporates, is how you link revenue to user participation. There is no clear guidance on that as yet, and many in the market have questioned how as a practical matter it is to be judged.
Who is caught?
The original proposals were widely drawn and many feared they would be inadvertently caught, especially given that few sectors these days have no online sales presence.
The final scope however applies DST to businesses engaged in only three key areas – search engines, social media platforms and online marketplaces.
It is explicitly not a tax on:
- Online sales of goods (though it will hit revenues from ‘intermediating’ such sales);
- Online advertising;
- Data collection;
- Financial and payment services;
- Provision of online content;
- Sales of software/hardware;
- Television/broadcasting services.
To be caught, a business must generate revenues from those key areas of at least £500 million globally, and the first £25m of relevant UK revenues are exempt.
This means that smaller businesses will not be caught by the tax. Rapidly growing businesses however will fall within it as soon as they pass that £500m threshold. This has triggered complaints of anti-competition in the market given that a global giant can more easily absorb the cost of DST than a smaller player trying to compete with them.
Is there a safe harbour?
There will be some sort of alternative calculation, so that those with thigh revenues but losses will be exempt and those with very low profit margins pay at a reduced rate. The details of this are not known yet.
What does it mean for you?
Although the final details will change, absent a complete government U-turn the broad ambit is unlikely to be altered at this stage and the DST will become law on schedule with effect from 2020.
The likely impact of the rules will depend on which business you are in, and how much of it is digital.
It is no accident that search engines, social media platforms and online marketplaces were the key areas chosen. The UK revenue authorities have had ‘established tech giants’, usually taken to mean Amazon, Facebook and Google, in their crosshairs for some time and this is just the latest in a line of new rules aimed at them.
That it because the UK government thinks that their business models derive significant value from participation of UK users which goes largely untaxed.
This online sales tax may be a step towards reviving the British high street. We at KaurMaxwell believe that it is vital that the government develops a coherent approach to taxing the digital economy. These proposals could work to motivate retailers to drive the majority of their businesses through physical stores to avoid the tax – which would help resuscitate traditional high street shopping.
If you have any tax related queries, please contact us on 0207 052 3545 or by email firstname.lastname@example.org.
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