Governments have found it very hard to capture the economic activity of the digital economy within the existing tax system, with public disquiet about the apparent mis-match between the taxes collected from and revenues generated in the UK by the multinational internet-based companies.
Both the G20 and OECD are leading talks to consider how the digital economy should be taxed, but these negotiations are unlikely to reach a conclusion in the medium term.
The Chancellor has announced that a new tax, the Digital Services Tax (‘DST’) will be introduced with effect from April 2020.
The DST will be a 2% levy on the revenues arising from UK users of:
- Search engines;
- Social media platforms; and
- Online marketplaces.
There will be a £25m per annum allowance and the DST will only apply to groups that generate global revenues in excess of £500m per annum from search, social media and marketplaces.
The DST will be tapered where the company in question has very low profit margins and down to zero where the company is loss making.
DST is a targeted measure, aiming only to impact on established, large-scale companies (we can probably guess the names of the companies that the Chancellor has in mind). The intention is that start-ups and ‘challengers’ will not be caught by the measures.
At this stage DST is only a statement of intent: the government proposes to consult on the exact form of the tax and has stated that DST will only remain in force until a co-ordinated approach can be agreed through the G20 and OECD mechanisms and could well be pre-empted by a wider international agreement.